Emend by Eclipse
Copyright© 2020 by Lazlo Zalezac
August 8, 1974
It was a Thursday and the weather was reasonable. It had started out at 70 degrees at 8:00 when they started mowing lawns and hit 81 when they finished shortly before noon. The weatherman said it would reach 90 in the afternoon, but they’d be done with all of their outdoor activities by then. The worst they would suffer was to drive around in the van which lacked an air conditioner.
They had just finished showering and changing out of their yard work clothes. They ate a quick lunch prepared by Tim’s mother. They were sitting around the table drinking iced tea while his mother was straightening things up in the kitchen.
“We’ve got a problem,” Benny said.
“We’ve got over nine thousand dollars in cash in Two Guys Working. We’re going to have to file taxes on that.”
Tim’s mother almost dropped the plate she was washing upon hearing that. She’d had no idea what kind of money the boys had been earning. She knew that the company they owned had paid for the van and the truck along with insurance, gas, and maintenance of the vehicles. She knew about the 1940 Ford truck they had purchased. She had seen all of the equipment they had purchased. In fact, she had been convinced that they weren’t making anything since it seemed like they were spending money as fast as they could get it.
To hear that they had $9,000 in cash was a shock. The median wage for a full time employee was around $11,000 a year. They had almost a year’s worth of income in cash. They were 15 and 16 years old.
“We’ve paid ourselves a little over three hundred, each.”
She had no idea they had paid themselves that much. She didn’t see any signs of them going out and buying stuff although they did eat out often and weren’t cheap when it came to their barbecues which almost always included steaks. She didn’t know that the majority of that money was going down the alley to Carol for personal services rendered.
“Really? We paid ourselves that much?”
“So what’s the problem?”
“Taxes. The partnership is a pass through tax mechanism, which means we share the taxes on the profits earned by the partnership. In our case that is nine thousand dollars. So, we’d each be paying taxes on forty-five hundred. Even worse, we have to pay double social security since we have to cover the business portion as well as the personal portion. Our taxes would end up being around twelve hundred dollars, each.”
“Its even worse than that.”
“The problem is that we’re going to have to find out how much we can earn and still be declared a deduction on our parent’s income taxes. We don’t want to go over that. Our moms and dads won’t be too happy with us if we do that.”
“I didn’t think about that.”
Tim’s mother was shocked that they were thinking about taxes in that sophisticated of a manner. She did appreciate that they were concerned about remaining deductions for their income tax.
“According to what I’ve been able to find out, that limits us to seven hundred fifty dollars a year income. Our taxes, which is entirely social security, will still be about one-oh-five, each.”
Benny was wrong in his understanding of the tax laws. Actually, it wasn’t because he misinterpreted what he read, but he was told a misleading thing when he had asked a person who filled out tax returns during the tax season. He had asked how much a person could make and still be claimed a dependent. Based on how he had asked the question, the correct answer is $750. At least, it is a correct answer except when the person is a full time student and it can be shown that the parents provided more than half of the support, isn’t claimed on another return as a dependent, and is an American citizen. In that case, the amount made by the student doesn’t matter as far as being a dependent on the parent’s return. This didn’t mean that they didn’t have to file their own tax forms.
This misunderstanding caused them to make a few decisions that limited their options later. They ran cash poor for almost half a year and were unable to take advantage of a few opportunities that came their way.
“That’s all? We can only make seven hundred and fifty bucks?”
“So we pay ourselves seven fifty a year. That accounts for about nine hundred from our cash. Only eighty-one hundred to go.”
“I figure we can purchase all of the parts for the truck. That would probably take another five hundred.”
“That’s a step in the right direction.”
“We need to rent a garage and buy a complete set of tools.”
“That’s clearly a justifiable expense. We can use the garage to rebuild the Ford.”
“I think we need to buy another car. A new one with an air conditioner.”
“I didn’t see that one coming. Why?”
“It will let us keep as much money as possible. Besides, we can always use a nice car for sales calls, and for you to drive on dates.”
“I can see where that would better than a truck. I also think we could have a big Labor Day picnic for the employees and their family.”
Benny said, “I don’t like it. I’m not a party person.”
“You’re right. That would be a bad idea.”
“Maybe rather than renting a garage, we should look at buying a small property with a garage and treating it like our business office.”
Tim’s mother couldn’t believe that they were talking about buying property. She was thinking that she’d have to get on the phone and talk to her husband while the boys were off at work that afternoon. This was beginning to sound like high finance or something. Her greatest concern was that they’d get into debt over there heads and have to start their adult life with a bankruptcy hanging over their heads.
“That’s not a bad idea. We would end up with a real asset that will increase in value.”
“It’s the most flexible investment we can make at the current time. We’ll be able to put lots of money into it without losing any value. Upgrade the house and do a little landscaping, or maybe even add a swimming pool. Next year, we could pay off the mortgage. All that would provide us with tax write offs until we actually sell the property. Then we’d get clobbered with capital gains taxes.”
“Let’s get the paper and look at the ads to figure out how much we’re talking about.”
They flipped through the paper looking at the real estate ads. There were a lot of houses that ran well outside their price range. The median price of a house at the time was $32,000 which was a bit more than they had to invest. Still, that was the median price and half of the properties sold for less than that amount. They just had to find one that sold for significantly below that.
Benny said, “There’s one here for eleven thousand-five hundred dollars. It’s a two bedroom frame on three acres of land. The town is thirty minutes from here.”
“We don’t have that much money and I doubt we’d be able to get a loan for that amount.”
“We’d be getting a loan for about five thousand. We would have to put down more than half which could act as collateral. It is a business loan rather than a personal loan. We have cleaning contracts that show we can make payments on it.”
“We don’t have any kind of credit, personal or business. Besides, that house has to be in pretty bad shape to sell for that.”
“It’s a two bedroom house and located in a rural area. It’s probably in a reasonable shape, but that’s the price it can sell for. It’s small for today’s market.”
“It doesn’t say anything about a garage.”
“We can build one next summer. The whole purpose of buying the place is for us to keep the money rather than handing it off to Uncle Sugar.”
Tim’s mother wondered who Uncle Sugar was and then realized they were talking about the government. She’d never heard the government referred to as Uncle Sugar and wondered what they meant by that. It definitely sounded derogatory, which was something she didn’t like hearing.
“If they’re asking eleven-five, then we can probably counter with ninety-five hundred, and pick it up for ten-five,” Tim said.
“You’re probably right. What we can do is put eight thousand five hundred down, and get a loan for five thousand. We’ll use the extra three thousand for improvements on the property. We back off on how much we pay ourselves and leave enough money in the business in case we run into problems. We need to talk to a tax man about carrying operating capital from year to year. The tax hit shouldn’t be too bad.”
Tim’s mother listened to the conversation. Tim was the youngest of the kids. His older brother Calvin was going to be a senior, but it was doubtful that he was going to graduate. He was more interested in a trade than an education. His older sister Katy was wrapped up in dating and a social life. She was the type of girl who would hope for a MRS degree from college. Tim was supposedly the slow one, but it sure didn’t sound like it. Based on what they were staying, he was going to own a house, or at least half of one, before getting out of high school!
“It’s one o’clock. We can call the Realtor, visit the property, and get back in time to clean the offices.”
“Why don’t you call the Realtor and get him to meet us at the property? We should also see about making an appointment with a mortgage broker. I suppose we ought to call a tax attorney and work out some of the details so we don’t get creamed if we are off base in our thinking. It sure would suck to spend all of that money and then discover that we owe taxes on it after all.”
“Okay, I’ll make the call to the Realtor now. We might want to have the Realtor suggest a mortgage broker. I’ll ask around for a reasonably good tax guy who is affordable.”
Tim’s mother had finished with the dishes, but she continued to putter around the kitchen to listen to the rest of the discussion. She was surprised at how Tim talked to the Realtor about viewing the property. He hung up the phone and returned to the table.
“The Realtor is a woman. She’ll meet us there at two.”
“That should be good. Did she say anything about the property?”
“According to her, the property was inherited by the original owner’s kids. They want to sell it and divide the money. It sounded like one of them is pretty greedy. She suggested that they were pretty firm on the price.”
“If they won’t deal, then we don’t buy it. There are other places on the market.”
“Remember to say that when we’re talking to the Realtor. I kind of got the feeling that she was just as interested in keeping the price up as the greedy kid.”
“I’ve got a feeling that she’s going to be surprised when we start negotiating.”
“I’d be surprised if she takes us seriously.”
“Our money is just as green as anyone else’s.”
Tim’s mother couldn’t find any way to continue looking busy, so she joined them at the table. She assumed that they would change the subject.
Pointing to another ad in the newspaper, Benny said, “Hey, there’s a used mobile home for sale for eighteen hundred. In the worst case, we can get some property and move that onto it. I don’t know how much it would cost to run water, electricity, and sewage to a place, but it can’t be that much.”
“How much is land selling for?”
“There’s a couple places advertised here that are four hundred an acre. They’re selling larger tracts, but we could always try to get them to cutout a smaller piece at let’s say five hundred an acre. Ten acres and a mobile home would be right in our budget range. It’s an option to put in front of the Realtor.”
“You know that she’s going to talk about tornadoes being attracted to mobile homes.”
“Remind her that is what insurance is for.”
“If she wants to put obstacles in our way, I’m more than willing to toss them right back at her.”
“Let’s say we get it for ten-five, and get a loan for five grand. What will our payment be?”
“If I remember correctly, a rule of thumb is that it’s about a hundred per ten thousand on the mortgage. We would be borrowing five thousand. On a fifteen year mortgage, the mortgage payment would be about sixty-five dollars, with insurance and taxes. That’s just a wild ass guess, though.”
“That’s a ball park we can work with. I’m sure that we can afford that.”
Tim’s mother said, “You boys are serious about buying property.”
“Sure we are, Mom.”
“We need to grow the value of our company without having too much cash on hand at tax time.
“Our company, excluding our current cash, has a valuation of about three grand when you include the van, the two trucks, the tools, and the cleaning contracts that we have. With the property, we’ll have a valuation of around thirteen thou. When we get the old Ford restored, the valuation of the company could reach twenty thou. If we can’t convert the cash to an investment, we’ll lose about two grand in taxes. Benny and I would be stuck holding cash that the business couldn’t use. That’s a significant amount of money.”
“Are you sure about that? It doesn’t make sense that you have to clear out all of the money at the end of the year.”
Benny said, “I’m not positive about that, but that was what I was told of the tax laws. That’s why I say we need to to talk to a tax attorney. I do know that if we buy the property, then we keep the money.”
“Maybe we should go back to the SBA guy.”
“That’s a good idea. In the worst case, he can put us in touch with the people we do need to talk with.”
“That’s a good point.”
Tim went off to make the call. His mother looked at Benny. “You aren’t doing anything illegal, are you?”
“Mrs. B, Tim and I have been very careful about being legal on everything.”
“Why are you boys working so hard? You’re young and this is when you can relax and enjoy life.”
“Actually, this is the time when every dollar we earn can turn into a hundred dollars later. So if we can get the value of the company up to twenty thousand by the end of the year, then in ten years that could worth two million. With that money, Tim and I can retire as millionaires. We won’t even be thirty years old.