admin

September 2, 2020

How to Crush the CPA Exam – One Man’s Guide

In my world of accounting, The Exam looms over new entrants to the profession or really anyone who hasn’t passed it yet. And I have seen a lot of really smart people struggle to get over this hurdle. It can be discouraging and maddening when you spend all of your time studying and then don’t find the success you crave. I’m here to help.

To be clear, I don’t have any magic to pass the exam. There isn’t a substitute for knowing the material. It requires a vast amount of studying. This post is about a couple of things that helped me score just enough points to be called a CPA. Feel the glory.

Develop skills in test taking

Tip #1 Break it down

Growing up in the age before Windows,

episode 4 before the empire GIF by Star Wars

(just kidding Widows is great), the Nintendo Entertainment System reigned supreme and computer games were only a shadow of what gamers experience now. They required using the Doss system (a blinking cursor) and a floppy disk (aka the save icon) to access your game through a string of typed commands that made no sense to me at the time, or now for that matter. Me being the cool kid I was growing up, could perform this sorcery whether I understood it or not. I had 4 primitive games, Win Lose or Draw ( which I still suck at), Wheel of Fortune (with a red headed Vanna White), Classic Concentration, and Jeopardy, Jr. I invested much more time in the latter 2 games than the former. Everyone knows Jeopardy and that is where we will spend most of our time but Classic Concentration was a great game consisting of a grid of tiles overlaid on a Rebus puzzle. Look it up. The goal was to solve the underlying puzzle that was uncovered as you match tiles in a game of memory. I have won enough virtual Chrysler Lebarons to start a dealership. Anyway, I learned a lot about test taking through these games.

Here is a secret to Jeopardy and a lot of tests in general… it isn’t always about knowing the exact fact that answers the question. I learned this so well growing up playing Jeopardy that it changed how I look at most questions and subsequently made me really good at trivia games. Seriously, I have played trivia games where it was me against whoever else was in the room, 3 or 15. I don’t lose.

When you are presented with a question in Jeopardy and the CPA exam as well, there are almost always clues within the question that can aid you in getting to the right answer, if you break the question down and sort through what you know, even if it isn’t necessarily the answer to question. Here’s an example from Jeopardy:

The Category is “Playwrights”, the question: His marriage to Marilyn Monroe inspired his play “After the Fall”

What can we learn about the answer from this question? It combines literature and pop culture. We are looking for a playwright, who wrote a play “After the Fall” and he was married to Marilyn Monroe. I know next to nothing about playwrights and have never heard of the play mentioned but I did know Marilyn Monroe had 3 husbands and that Joe Dimaggio (one of the 3) wasn’t a playwright. My pool of possible answers is down to 2 names now instead of hundreds of playwrights. I happened to know one other person she was married to, Arthur Miller, and that is the answer. By breaking down the question, I was able to get the answer without necessarily knowing the fact.

How does this principle apply? The CPA exam takes a bit of pride in that it requires you to select the “most correct” answer, meaning multiple answers could potentially apply but one answer does a better job than the others. Using the above methodology, you can sort out what you know and apply it to the question to eliminate answers and narrow your pool of potential answers. If you eliminate 1 answer as obviously incorrect, you increase your odds of guessing the correct answer by 8% from 1 in 4 to 1 in 3. That may not sound like a huge difference but getting 3 or 4 more questions right could make the difference between a 70 and a 75. If you can eliminate another answer, you increase your odds another 17% to 1 in 2. That is a huge increase. So break it down and take a guess.

Tip #2 Get Some Sleep

You can google numerous studies on the benefits of sleep. Sometimes it can feel like you need to cram, cram, cram and trade sleep for study. But without proper sleep, your ability to recall that information is severely limited and you haven’t adequately rested your body and mind. It is during sleep that your brain converts those last minute cram sessions into information that can be recalled. I have been known for having an above average memory (probably due to playing Classic Concentration) and I have noticed a significant difference in its function depending on the sleep that I get particularly over multiple days. It isn’t recommended taking the CPA Exam while drunk. Likewise, it isn’t recommended taking it exhausted. If you are embarking on a career in public accounting, you will have plenty of “opportunities” to pass up sleep and work instead. Take the sleep now.

Tip #3 Eat a Good Breakfast

Yes, even if “you don’t do breakfast”. To be clear, I don’t mean grab a poptart or egg McMuffin. Eat a legitimately good breakfast. Breakfast helps start your metabolism and get your brain working properly. If your only option is a bad breakfast or no breakfast, skip it then. But it doesn’t take long to scramble some eggs, toast some bread or eat some Greek yogurt. Eating a good breakfast will keep you from being hungry, which breaks your concentration, and will give you fuel for your brain to function. Despite your brain occupying 5%of your body weight, it can require 20% of your daily calorie usage. Feed it.

Tip #4 Take it as soon as you can

This is a tip that is universal but I realize may come too late for some. Take the test as quickly as you can after college. You will never be better equipped than right out of school to take this test. The CPA Exam covers a wide breadth of material, as did your accounting degree. Your job will not. Most likely you will focus in one area of accounting and the longer you wait, the more specialized you will become. Don’t misunderstand, experience and specialization are good for your career but not the test. The ability to study and the ability to take tests are largely learned. You won’t do this much in your career and those skills will atrophy.

As a young staff, in general, you will never have more time available to you than you do now to take this test. You may feel like you are busy and don’t have time but you are wrong. You will have busy season, but that will never go away. Then you may add a spouse, civic activity, and kids. After having a child, I can’t imagine trying to make time to study too. And that is just with one. Children are wonderful, and they take a ton of time. The more kids you have, the more time they you want to invest in them. I digress, but the point is, take the test as soon as you can after college.

Tip#5 Stay calm

Take a deep breath and focus on what you know. Noticing your breathing will help you to focus on what you can remember and move through the questions in a consistent way. Don’t get too bogged down on any one question. If you get hung, don’t overthink it, go with your gut.

It could be worse. “More Experienced” accountants love to tell the youngsters about how terrible the test used to be and how hard their experience was. In many respects, it was harder having to take all 4 parts over 2 days or whatever it was. But in our defense, there wasn’t as much material to cover in each section either. You’ve put in the work. Trust what you have done, and knock it out.

July 24, 2020

Getting Your Business Organized

Organization can mean different things from an accounting perspective. Most people would think it refers to how well you keep up with your receipts and tax docs. It does mean that but not in this post. In this post we are talking about how your business is organized, meaning, how it is setup and structured.

You may think, what is it the point of that? I have the next great industry disrupting doo-dad with orders to fill. Awesome. But how you have your business structure setup can have huge tax impacts now and in the future, depending on what you are doing.

One of the biggest reasons to organize your business is for protection. Certain types of entities (Corporations and Limited Liability Companies) can provide liability protection for you as the business owner. What is liability protection? Well, if someone gets hurt using your new doo-dad and they initiate legal action, in theory, your entity acts like Dikembe Mutombo protecting the rim and will protect your personal assets from creditors looking for restitution.

(Yes, I know that’s not Dikembe)

Thats a legal thing though and you may want to talk to an attorney about more details. Sometimes you can accomplish similar things using insurance.

There are multiple options to choose from: Sole Proprietorship, General Partnership, LLC, or Corporation. LLCs are can serve a lot of different functions if you are looking for flexibility, but taxation can get pretty tricky pretty quickly if you are operating in multiple states or trying to being in new capital. Corporations can be simpler but they aren’t as flexible and can subject your income to being taxed twice if you don’t plan properly.

Different entities fit different purposes. Right now, the top corporate rate is lower that the top individual rates, but that doesn’t mean you should automatically choose a corporation as your business structure. It is definitely a better fit than it used to be but if you get tripped up and get your income double taxed, the rate won’t be lower at all. There isn’t a one size fits all recommendation. Be sure to do your homework.

June 5, 2020

Getting rid of your house and Paying $0 in tax

As a professional practicing CPA (I know..I made poor life choices), I bet every other month I have a client ask a variant of the following question: “I’m selling my house. Do I have to pay tax on that?” Sometimes, the answer is “It depends on who you are asking”. If you ever ask someone from the government this question, the answer is nearly 9 times out of 10, you definitely have to pay tax. But I say in the immortal words of the great Lee Corso:

Inside the depths of the IRC (that’s tax speak for Internal Revenue Code) there lies a great exclusion from tax for the gain on the sale of your personal residence. Here is how it works. First off, you are only taxed on the gain you make off the sale, not your gross selling price. You are allowed to deduct things like:

brokerage commissions
home improvements
your original cost of the house

from the sales price. This net amount, the gain, is at most what you might pay tax on.

If you owned your house for at least 2 years and it was used as your personal residence for at least 2 out of the last 5 years, you can exclude up to $250,000 of gain income from taxation. If you owned the home jointly with your spouse, you both get the exclusion. That’s $500,000 of gain to be excluded from tax.

That’s the basics. Like everything in the IRC, there are a bunch of other details that can affect this “simple” exclusion like:

I own multiple personal residences
I didn’t own it 2 years
My spouse died
What is a personal residence?
I rent it out

If you run into questions like these, contact a professional for help. Don’t call the IRS. They’ll just tell you its taxable.

May 15, 2020

A Fire Shut up in my Bones

I never really intended for this to be the space where I would share this sort of thing, but I feel somewhat like the prophet Jeremiah that I referenced in the title of this post. I have had a thought in my head for some two months now that I find often times distracting and I need to get it out. This, at the current time, is the only spot I have to share it. If I have enough of these, then maybe I will create another home for them.

A few months ago a friend of mine was sharing some communion comments at church and I wondered to myself, if I was asked, what would I even try and share. What novel idea could I bring that would highlight our communion time? I didn’t have one. A week or so later, I was prompted to revisit a book I hadn’t read in 10 years. It was there that the following message was highlighted. Sometimes, it is not the new message that needs to be shared, but the basic and easily overlooked.

He loves you. It’s as simple as that.

So often in religion, it’s easy to get caught up in the “shoulds”; I should do this, I should want this, I shouldn’t do that. Satan uses theses “shoulds” to drown out the simple message of Jesus Christ, The Father loves you. The message of Jesus is good news and we let it get covered up by the mundane-ness of life and how we think life should be. God loves you now, in this moment for who you are, not for who you think you should be. God, the Father, loves you now, in the brokenness you know, and the brokenness you don’t yet know. He knows your quirks, your bad habits, your struggles and doubts. He loves you, all of you. Are there things he would like to see you do differently? Undoubtedly. But that does not change this one simple truth: He loves you.

Luke 15 tells the parable of the Prodigal Son. As a quick summary if you aren’t familiar, the story revolves around one of the sons of a wealthy man who requests to receive his inheritance in advance and leaves his father’s house. The son proceeds to completely squander the wealth and quickly finds himself with nothing, scraping by feeding pigs who are eating better than he is. The son decides to return to his Father’s house, and beg to be a servant, since he knows servants in his father’s house are treated better than his current circumstances are treating him. He returns to his Father and he is welcomed back not as a servant, but as the son he is, despite previous actions.

But there is a great verse in Luke 15 that I had somewhat skipped over in the number of times I have read this story. Verse 20: “While he [the son} was still a long way off, his father saw him and felt compassion, and ran and embraced him and kissed him.” This is beautiful. The son, in his regret and shame, has worked up an apology he intends to offer to his father with the faint hope his father will show him the slightest mercy and take him back as a servant. This isn’t what happens at all. He doesn’t even get the chance to give it. Instead, out of the love the Father has for his son, He runs to his son and embraces him for the Father has his son back, no apologies. The son offers the apology but it falls on the ears of an overjoyed father holding his son, ready to celebrate the reunion.

This is the illustration that Jesus provides to demonstrate the good news he brings. We have a Father who loves us from a long way off, not because of what we do or don’t do, what we could be or what we aren’t, but because He is who He is. The Father who loves.

There is another son in this story, one who is always by his Father’s side, and one who is not excited about his brother’s return. The Father reassures this brother as well, that his own place has nothing to do with his brother’s return. He has the Father’s love as well. In my youth and arrogance, there was probably a time I saw myself in the shoes of the older brother, knowing I should have compassion on those who find their way back. But as I have grown older and hopefully a little bit wiser, I realize just how far off I really am from the Father, and I’m thankful that He runs to me while I am still a long way off. He loves me.

October 30, 2018

10 Ways for New Homeowners to save money on their Taxes : Way #1 – Your Mortgage Payment

You have decided to become a home owner…Congratulations! Most people are very excited when they buy their first home, with good reason. You have succeeded on huge decision and have a space to make your own. Others may be thinking:

Most people never think of the tax advantages now available once they become home owners.

One of the difficult parts of my job is not being able to answer questions simply. Nearly anytime one of my friends says, “Hey, I have a tax question. Is _____ deductible?” The vast majority of the time my answer is “It depends”. Nearly everything in the tax code is subject to some stipulation, income limit, or other qualifications. If you actually read the forms, it is like trying to follow the most lame “Choose your Own Adventure” book ever. The end of every story is “You owe more money”.

Following in this post and others to follow are a few areas where home owners can save money on their taxes. As always, these are general suggestions and may not be applicable to everyone. Pretty much every thing in the tax worlds can end with that disclaimer.

Mortgage Interest

For all of the excitement that owning a home brings, the downside is that it comes with a monthly mortgage payment. In case you are brand new, your mortgage payment is one payment that is generally paid to your mortgage lender to fund some of the costs of you home ownership. Your mortgage payment is generally a combination of 3 different payments sometimes 4 depending on your loan. It is always split between amounts applied to principle and interest and then usually another piece for escrow items. We’ll cover escrow in a minute. Depending on your loan situation, you may have a 4^th piece that is for mortgage insurance. The portion of your payment designated as interest is deductible as an itemized deduction on your tax return. It is often one of the biggest deductions that people have.

Itemizing – what does that mean. When it comes to deductions on your tax returns, there are 2 primary categories: business and personal. Business expenses specifically reduce business income. We’ll go over those another time. For your personal expense, the IRS allows you 2 options: You may take the “standard deduction “or “itemize” your deductions. The standard deduction is a per person amount that is pre-determined. If you have specific expenses that exceed the standard deduction, you can file Schedule A and provide an itemized listing of these expenses. Mortgage Interest falls here.

Real Estate Taxes

Local municipalities generally assess a tax on real estate and the property owner is responsible for paying it. Most new homeowners pay this tax as a part of their mortgage payment. It is one of the things that is paid through the escrow account. The escrow account is an account with your mortgage holder where they administer certain funds to pay necessary costs of the home that protect their mortgage security. The funds you put into escrow are usually used to pay your real estate taxes and home owner’s insurance.

Real estate taxes are paid annually and are also deducted as an itemized deduction on Schedule A, just like your mortgage interest that we discussed earlier.

So here is the new downside about Real Estate Taxes, as a part of the recent Tax Cuts and Jobs Act, deductions for local taxes are limited to $10,000. Real Estate taxes are a piece of that. That sounds like a pretty generous deduction that most first time home buyers wouldn’t need to worry themselves with, except that other state income taxes are also included in this limitation. If you live in a state that has an income tax, it is pretty easy to hit that phaseout, especially if it is a state like New York or California that imposes a relatively high income tax combined with relatively high property taxes.

Mortgage Insurance Premiums

These have been around for a long time but really came to the forefront after the bottom fell out of the real estate market starting in 2008. Banks experienced dramatically higher rates of foreclosure and in order to help protect their exposure, began requiring more borrowers carry mortgage insurance. In most cases, unless you make a down payment of at least 20% of the cost of your house, you will be required to also pay mortgage insurance. Since more people were foreclosing, the rates on this insurance increased dramatically. As a way to help homeowner’s, Congress allowed this insurance premium to qualify as an itemized deduction. You are disallowed from taking this deduction if you are deemed to make too much money. We in the biz call this a “phaseout”. For a couple filing a joint return, it was $110,000 for 2017.

That covers all of the deductions incorporated into your new monthly payment. Generally most lenders will report all of these numbers on your annual Form 1098 mailed to you at the beginning each year. Each number is in a different box on the form. On this form moving forward, you will also find the balance of your mortgage, which becomes important if your balance is over $750,000 and didn’t originate before 2017. All of this should help put a little more money back in your pocket which is what this blog is all about. If you have any thoughts or questions, please leave me a comment below. I will follow up with you there, or potentially through a future blog post.

June 21, 2018October 30, 2018

Welcome

Thanks for visiting! This is a blog for curious students who want to learn a little about finance and have some fun doing it. Or its a blog for those in need of a chuckle with some knowledge on the side. Either way, I’m glad you’re here and hope you have a good time. Peruse the site, leave a comment, ask a question. I’ll be happy to answer.