Computer Frustrations!

My desktop computer crashed in October, the Monday morning after the last tax filing deadline of the year (fortunately not before!), and after so much trial and error, it is now operating again. Here’s what I learned in the process; it might help someone else in the same predicament:

Computers come with Vista operating systems off the shelf at the retail stores today. You need to special order a computer to come with Windows XP. I found that “Best Buy for Business” allows you to custom order a small business computer with Windows XP directly from Hewlett-Packard (HP) via Best Buy. Included with that computer is a three year, on site, warranty for the computer. HP also offers immediate telephone support for these small business computers if you encounter problems in setup or operation. There are some programs in the set-up process that are no longer allowed to be installed by Microsoft; you will need to download these directly from other websites of the third-party providers.

Reconstructing a crashed computer will result in many problems along the way. The operating system has to be reinstalled. “Fixes” to the operating system and associated operating programs may not get installed in the proper order; the various individual programs are interdependent on each other, and a fix to one program might not work with the version of a related program, resulting in problems reinstalling your software programs. I noticed this with QuickBooks 2007 and 2008. Those two programs required .NET Framework 2.0 and Windows Installer 3.0, along with Adobe Flash. I had .NET Framework 1.0 and 1.1, but could not load 2.0 no matter how many different variations of the program from multiple sources that I tried. Eventually, many, many hours later, I was able to get Windows Installer 3.1 working, and then jumped up to .NET Framework 3.5, the latest version available today, and that installed all prior versions in between so that QuickBooks 2007 and 2008 could install.

Also, your antivirus, antiphishing, firewall and other security type protection programs have to be reinstalled, but only after uninstalling any “shadow” of any former version of those programs. In other words, you can not just restore a computer back-up. All software must be reinstalled into the computer’s registry; that doesn’t happen with any restore type program. (Computer back up programs only work to back up your data.) This meant re-setting up the original antivirus and Internet security software that came with the computer, then uninstalling it, and then reinstalling the latest version. This is because when you do a restore, the restored software does not get restored to the registry, and does not show up in your “add or remove programs” window, so you can’t uninstall it unless you install it first, eventhough it might be there on your hard drive, interfering with installing subsequent versions.

If all of this makes you dizzy, I understand! In small business operations, the business owner is usually, as my Dad always said, “Chief cook and bottle washer”. Hiring supposed experts in other fields like computer problem solving doesn’t always work unless you know a specific all around genius in the field; I haven’t found one yet! Yesterday’s National Federation of Independent Business newsletter, confirmed that with an article saying that small business owners use sleeping time, overnight, to solve their business problems. Yes, after so many approaches yesterday, long into the night, I put it to rest and started again this morning, and by noon had all of the operating system working again, even better than before the crash.

There is no way to prevent a computer crash; it is just a matter of time and then it happens. But do back up your data on a daily if not continuous basis. When the crash occurred, I had a complete back up of all files on a portable hard-drive which I plugged into my laptop, and continued with business as usual while going through both the reconstruction process and setting up a new desktop computer. I didn’t miss one email, nor did I lose the prior emails. There were three spreadsheets in process that weren’t yet backed up, and I found a firm specializing in data recovery who was able to recover two of the three spreadsheets.

Keep your back up separate from the computer you’ve backed up, especially if you have a laptop. Laptops get stolen quite often; password protect your laptop and don’t let it out of your sight. The password will mostly protect the data; the laptop will get reformatted by any thief. You can replace the laptop, but replacing the data won’t be easy without your daily back-up!

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History of the AMT (Alternative Minimum Tax)

Back in 1967, there were 155 individual tax returns with incomes above $200,000 on which NO income tax was paid because of the various tax credits, deductions or “loopholes” that exist in tax law. Some of these people were millionaires. Congress was infuriated, and in 1969, passed the Alternative Minimum Tax so that “rich” people would pay some tax.

If you look at $200,000 today, adjusted for inflation, you’d be looking at incomes well over a million. Unfortunately, the AMT happens with wage income well under $200,000 and the personal exemptions from having children. The recent increase in the amount of income not subject to AMT s is not enough to fix this inequity. This is because the exemption for children is considered one of those “loopholes”. And on those tax returns where I see this happen, the individuals ARE NOT millionaires. They are struggling to put their children through school, paying mortgages and high real estate taxes and state income taxes (Wisconsin ranks up in the top 10 for highest state tax rates in the nation), which further penalizes them into paying higher Federal income taxes because the state tax deductions are also a “loophole” taxed by the AMT.

Our tax laws penalized marriage from about the same time as the AMT was enacted, until just a few years ago when Congress changed most married, filing jointly items to be twice that of the single amounts. The AMT law penalizes having children. Why doesn’t Congress finish their AMT reform and take the exemption for children out of the picture for calculating AMT?

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Delayed Tax Forms

As a result of the Alternative Minimum Tax (AMT) patch that was signed into law the other day, the tax forms have to be reprinted and reprogrammed in all of the IRS’s computers and with all of the software businesses who sell tax software.

If your tax return is affected by the following forms, your return will have to wait until it can be filed with the all of the correct calculations:

Forms 8863 (Education Credits)

5695 (Residential Energy Credits)

1040A’s Schedule 2 (Child and Dependent Care Expenses for Form 1040A Filers)

8396 (Mortgage Interest Credit)

Interestingly enough, the AMT Form 6251 is corrected first, and won’t be delayed. This is because IF you are affected by AMT, the IRS would like you to file early so they get their money early. The delayed forms play into the AMT calculation but usually result in refunds, and so of course it is not important to fix those first.

The IRS has given February 11th as the earliest date in which the affected forms can be filed with them. That usually means all of the tax software should have the bugs ironed out by the end of February. Another interesting tax season ahead…

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Financial Phonics (R) December 2007

Tax Facts Issue

Standard Mileage Rates

Employee / Business

$0.485 – 2007

$0.505 – 2008

Medical / Moving

$0.20 – 2007

$0.19 – 2008

Charity/volunteer $0.14

Over 70? Don’t Forget Your RMD

Even if you are still working in the year in which you turn age 70 and a half, you must start taking the Required Minimum Distribution every year from your IRA accounts. This includes SEP-IRA’s and SIMPLE-IRA’s and inherited ROTH IRA‘s.

The penalty for failing to take the RMD is a 50% tax on what you should have withdrawn. Given the stiff penalty, this is not something to ignore.

In many instances, your IRA trustee or your investment broker will alert you, but this does not always happen. It is still your own responsibility to comply with the law.

To calculate the RMD for 2007, you will need the value of all of your IRA account balances at 12/31/2006, your age at 12/31/07, and one of three different life expectancy tables. Call or email us if you have questions about how to calculate the RMD; we don‘t want you to have to pay the 50% tax!

Residential Energy Credits

For 2007 only, you can still receive up to a $500 total lifetime tax credit on your individual tax return for the purchase of qualifying energy efficient appliances or property improvements. This includes replacing windows, doors, adding insulation, replacing a furnace, hot water heater or air conditioner. Check to make sure that any improvements meet the standards established by the 2000 International Energy Conservation Code or the Energy Star Program.

The credit is equal to 10% of your expenditure, up to these maximums: $300 credit on water heaters, central air or heat pumps, $200 credit on windows, $150 credit on a furnace, and $500 credit maximum on metal roofs, insulation or exterior doors. Let us know what you’ve improved on your personal residence this year, how much it cost and we’ll check to see if the credit applies. This credit expires 12/31/07, so if you were going to do it soon, make the improvement now!

Section 179 Deduction

For 2007, Congress has increased the Section 179 Deduction to $125,000 on the Federal tax return, but Wisconsin is staying with the $25,000 maximum. In 2008, Wisconsin will allow only farmers to use $108,000.

This deduction allows businesses, including self-employed individuals, to immediately deduct the cost of equipment put into business use, rather than writing off the cost over the life of the equipment in usually three to seven years.

Capital Gains and the Kiddie Tax Trap!

For 2007, the capital gains tax rate is 5% for those in the 15% tax bracket or lower, and 15% for those in the 25% bracket or higher.

For 2008, the capital gains tax rate drops down to 0%, yes, ZERO TAX, for those in the 15% tax bracket or lower.

If you are in the 15% tax bracket, 2008 is definitely the year to take your capital gains. And 2007 would then be the year you would take your capital losses, but no more than $3,000 because you don’t want those losses over $3,000 carried forward to 2008 where you’d lose the benefit of the Zero tax.

At the same time this Zero tax becomes effective, Congress threw in a new trap, widening the application of the kiddie tax. In 2008 and later, students aged 18 to 24 are taxed at their parents rates when they sell investments and have capital gains. This means high school and college students won’t have access to the Zero tax on gains!

If you are a child aged 18 to 23 in 2007, getting ready to cash in your investments to pay for college, you MUST SELL ALL IN 2007 if you have gains to be realized. Put the proceeds back into an account to be ready to cash out when you need it in the next four years.

The gains that accumulate over the next couple of years won’t be as much as you’ve probably had to date through 2007.

Alternative Minimum Tax

As this newsletter is being printed, Congress is out to lunch on what it will do about the AMT (Alternative Minimum Tax). This is the tax that gets added onto your regular income tax when you have too many tax preferences. In Wisconsin, our high state income and property taxes are considered a tax preference, as are exemptions for children. So if you are married, both parents working, and you have children, and you live in a high property tax area like Madison, you get hit with this extra tax.

Everyone expects Congress to do something about this outrageous tax on families with children, but it may not happen for a few more months, and it may be retroactive to January 1, 2007. This will really make tax season interesting. We may not be able to finish tax returns for those hit by AMT until Congress makes its decision on who gets to pay and how much. The AMT is scheduled to start at $45,000 of taxable income on a married, filing jointly tax return, or $33,750 single.

In the meantime, here’s a few things you can do to minimize your potential for being hit by the AMT:

1) Take capital losses in 2007;

2) Invest in US Savings Bonds to defer interest income to a future year;

3) Increase charitable deductions – receipt needed for ALL charity now;

4) Pay January 2008 mortgage interest before December 31, 2007;

5) Pay real estate taxes when due, (pay at least $2,500 per year to take the Wisconsin homeowners credit.)

6) Have your employer reimburse your employee business expenses versus taking as an itemized deduction.

Mortgage Insurance Deduction in 2007

For one year only, 2007, you are able to deduct your mortgage insurance premium with your mortgage interest, as an itemized deduction. This is only for the purchase of a home in 2007 or for the refinancing in 2007 where mortgage insurance is required. If you qualify, you should receive a form 1098-INT with an amount in Box 4 for mortgage insurance paid.

The information provided in this newsletter is intended to inform and not advise. Opinions expressed reflect the authors’ knowledge and judgments about the law and markets as they exist on this date and are subject to change. No one should ever apply or interpret the information without obtaining the advice of a trained expert who knows the person’s facts and circumstances. Individual facts and circumstances may change how the law or rules would be applied or our judgment about the appropriate action to be taken.

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Woodstock for Capitalists

This year’s Berkshire Hathaway annual shareholders’ meeting provided lots of little bits of wisdom, just like all the others. I’ve only been attending these meetings since 2001, and in these past seven years, attendance has tripled to where this year there were 27,000. Omaha may need to build a bigger convention center again to hold next year’s attendees!

For your reference, I’ve taken these notes this year, from all of the questions asked of Warren Buffet and Charlie Munger:

Insurance

Hope over time to break even in underwriting because earn lots of dollars on the float and have lots of float.

Private Equity Activity

What could slow it down…..yields on junk bonds going up

BH owns forever and doesn’t sell so won’t really compete with private equity activity.

International/Global growth of BH?

BH is not on the radar screen overseas; no bias against buying outside US in marketable securities or the entire business; can be criticized validly for not doing so (investing globally); also have to inform the public in UK & Germany what BH is buying and when if greater than 300 million; all that public disclosures screws up making any purchases (price can rise with the announcement that going to buy and then not affordable to buy).

Executive compensation unfair to investors?

Poor management is worse than a poor compensation system. Envy is more the problem. No upside to envy; need to compensate for what is under the executives’ control.

Air travel

NetJets has been valuable to accomplishing business deals; corp jets have been a real asset to BH. Trappings of power when abused are disappointing to investors, but not when used for efficiency and effectiveness as with NetJets .

Explain credit contraction on BH?

BH benefits when others suffer.

The Fed Reserve was established to prevent the effects seen historically: bank failures, stock market crash, etc

Corporate profits now jumped up to 8% from 4-6% and as a result, there are higher corp taxes; so the labor component of GDP has fallen; a lot of the profits are now in the financial sector (banks, investment management groups).

(Need to be smart enough to have experienced troubles before)

Retirement accounts, etc., and cash on selling short:

Delays in delivery of stocks bought or sold is slop in brokerage firms

Lots of slop in derivatives

Clearance systems are failing

Gambling companies have a great future?

“Tax on ignorance”, like dreaming about having an ATV versus having one

BH won’t be buying gambling companies

Read all you can; fill your mind with various competing thoughts and then invest. Without all this learning and doing, it is like reading a romance novel and doing something else.

What do you own and why do you own it?

Get into the habit of thinking that way….buy a great business.

Health care mess – can BH help it?

In order to do very well in health insurance, you need low distribution costs; as it is now, benefits are paid out from premiums received but no one out there doing a good job with low distribution costs.

Intrinsic value:

BH retains all of its earnings and what will it do with them over time –

“Skill at which retained earnings would be used effectively”;

Each dollar has a greater value

Hard to judge at BH: future is not the same as the past; hard to think;

By being a “learning machine”, always reading, etc., = owner oriented

Derivatives = Financial Weapons of Mass Destruction

Derivative itself okay, but the usage of them on expanding basis introduces more and more leverage into the system.

We may not know exactly where danger begins or ends, but it will go on to increase and unpleasant things will happen (i.e., forced sales – stop orders, which are “portfolio insurance” or “doomsday machine”

For example, with GEN RE – mark to market per FASB but market is psychological and can vary instantly with any type of market hype.

Short term investing – participants are playing a different game

Human behavior is involved and irrational when en masse

Six sigma theory all out the window!

On replacing Warren: Not looking for someone to teach but rather who knows how to do it; someone who understands conditions we haven’t even seen yet and won’t blow it. (see intrinsic value above where he said that the future is not the same as the past)

Early investing: trade less attractive stocks for more attractive stocks (limited $)

Later investing: with more $ than investments to choose from – can buy 20% of a stock and not cause too much imbalance.

Railroads competitive now

Better on the labor front

Trucking industry fuel costs are 4 X Rail

No new capacity in rail business

What used to be highly regulated

It is highly capitalized and doesn’t get extraordinary returns but it can be a good business over time.

Best way a 10 year old can earn $?

Deliver newspapers

Business success correlations found best with the age at of the 1st business venture

Make yourself reliable

BH has a good group of businesses – DON’T WANT:

High labor content

Or goods shipped in from abroad

Or a competitive position that can erode over time

The $ is declining over other major currency.

Boards of Directors

Past members are “potted plants”

Recent rules require more “process” for transparency

The Right CEO is one who seeks counsel with the Board, not overreacting

Boards bring independent judgment

A real owner’s board is on in which there is no board compensation or de minimis and own stock in the company.

On business “partners”

Normally don’t do deals with partners for dollars or in relying on the brains of others

Want 100% of any deal, upside or downside.

Commodities

Have no opinion on commodities; but have opinions on the companies

Need business with little capital investment so can good return on the capital

Newspapers and the NY Times

The newspaper is like looking in the rearview mirror versus what you want to do is look through the window.

For more information, download the annual report from BerkshireHathaway.com

http://www.berkshirehathaway.com/2006ar/2006ar.pdf

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