April 15th 2019
The 2019 tax-filing season just began, and for a good measure of folks, so did that niggling knot in the gut. Not that you’ve done or intend to do anything underhanded, but right on time the annual anxiety arrives. It shouldn’t. When it comes to tax preparation, the second biggest mistake many business owners make is nearly as important as the first, and that’s...
It's Tax Season: Don't Fear The Audit
The 2019 tax-filing season just began, and for a good measure of folks, so did that niggling knot in the gut. Not that you’ve done or intend to do anything underhanded, but right on time the annual anxiety arrives. It shouldn’t.
When it comes to tax preparation, the second biggest mistake many business owners make is nearly as important as the first, and that’s fearing rather than respecting the Internal Revenue Service. They are apprehensive to take deductions they rightly deserve, for fear of raising the proverbial red flag.
But what are your chances of being audited? Current stats might surprise you. In fact, the overall odds of being audited are so low that most legitimate deductions aren’t likely to send up red flags at all.
Considering the potential tax season chaos caused by the longest partial government shutdown in our history — and that only about 57 percent of IRS employees remain in the workforce in January — the IRS clearly has much bigger things to worry about. Issuing tax refunds in a timely manner and maintaining a measure of order with this year’s tax filings will likely be IRS priority.
Add to this, the agency was already trimmed back, even though the number of Americans filing has grown (150 million individual tax returns were filed in the fiscal year that ended in September). And audit rates already had dropped to historic lows (down 40 percent from 2010 to 2017). The IRS only audited .5 percent of all tax returns filed for the fiscal year 2016, which marks the lowest percentage of audits since 2003.
So, for the average American, the odds of being audited are a chance of about one in 160. The odds are lower if you’re in the middle- or lower-income range and your taxes are fairly straightforward. (On the flipside of these figures, audit odds increase with significantly higher incomes and complicated tax returns.)
Roughly half of the audits the IRS conducted centered on a single issue — the Earned Income Tax Credit for low-income working families. The rest focused on small businesses, especially sole proprietorships. Think: industries such as pizza parlors and coin-op laundromats, where significant opportunities exist for hiding income and skimming profits. In fact, the IRS publishes an entire series of audit guides to download from its website that tells exactly what its agents look for when auditing people.
So if you do get audited, what then? Well, if you’ve accurately documented your legitimate deductions, you have little to fear. Of the 1.1 million tax returns the IRS audited last year, almost 34,000 audits actually resulted in additional refunds to taxpayers. (Another 20 percent of audits typically result in no change either way.).
And if you lose? You’ll get what the IRS calls a deficiency notice, which is simply a bill for more tax. If you still think you’re right, then you can appeal it to the IRS. If you don’t like the result, you can appeal to the U.S. Tax Court. There’s even a small claims division for disputes regarding amounts less than $50,000.
Just how aggressive can you get before risking actual penalties (as opposed to merely paying more tax)? You can avoid accuracy-related penalties if you have a reasonable basis for taking a position on your return. Generally this means your position has more than one chance in three of being accepted by the IRS.
Still concerned? Consider this: for fiscal year 2016, the IRS initiated only 3,395 criminal investigations. That’s an almost unimaginably tiny fraction of the 240 million returns it collects in a year. Of those investigations, the IRS recommended 2,744 prosecutions. (IRS investigators don’t actually prosecute; they turn that job over to the Department of Justice.) There were 2,669 convictions that led to sentencing — the Feds don’t take you to court if they’re not already pretty sure they can win.
In the end, the average honest tax filer really has nothing to fear from the IRS Criminal Investigations unit. Here’s the bottom line: Never be afraid to take a legitimate deduction. And if your tax professional recommends you avoid taking advantage of a strategy you think you deserve, ask him or her to explain exactly why. Don’t be satisfied with a vague “It will raise a red flag” reply. Remember, it’s your money on the table.
March 15th 2019
It’s tax season. Knowing that the gig worker is often at home working hard—it’s important to understand how your workspace affects your tax return. The home office expense still elicits occasional eye rolls from tax professionals who are well aware of its historical misuse and abuse. And some taxpayers avoid claiming legitimate home office expenses, for fear of getting...
Home Office Expenses
It’s tax season. Knowing that the gig worker is often at home working hard—it’s important to understand how your workspace affects your tax return. The home office expense still elicits occasional eye rolls from tax professionals who are well aware of its historical misuse and abuse. And some taxpayers avoid claiming legitimate home office expenses, for fear of getting audited.
Certified number crunchers often did little to allay their worries. (Maybe they thought avoiding the line item deductions kept their jobs simpler.) However, back in 1994 the U.S. Supreme Court made it easier for taxpayers to qualify for this deduction, and by 2007 Congress stepped up and simplified it more.
Here’s a brief overview but be sure to consult with your CPA on how to manage this information and tax questions you may have.
Your home office is considered deductible if:
- It’s your “principal place of business” OR
- You use it to meet clients, patients, or prospects in the standard course of your trade or business OR
- It’s a separate structure not attached to your dwelling unit
Most deductible home offices qualify under Rule #1 of IRS Publication 587 Business Use of Your Home. The section states that your home office qualifies as your principal place of business if:
1. You use it “exclusively and regularly for administrative or management activities of your trade or business”
2. “You have no other fixed location where you conduct substantial administrative or management activities of your trade or business”
This is true even if you have another office, as long as you don’t use it more than occasionally for administrative or management activities. And it’s true even if you belong to a co-working space. You also can claim that membership on your return.
Take for instance: You’re a real estate agent and you have a desk at your broker’s office. Your home office qualifies as your principal place of business as long as you use it as the space where you manage your business and keep your books. (You don’t regularly do those tasks at your desk in your broker’s office.)
Your home office doesn’t have to be an entire room. It can be part of a room as long as it meets the requirements. You also can claim a workshop, studio, or other “separately identifiable” space you use to store products or samples. If you use it for more than one business, both have to qualify to take the deduction.
You have to use your office regularly (defined as 10 to 12 hours weekly) and exclusively for business.
To prove your deduction, keep a log and take photos to record your business use.
Once you’ve qualified, you can start deducting expenses. If your business is taxed as a proprietorship, use Form 8829. If you’re taxed as a partnership or corporation, home office expense should be reimbursed since there’s no separate form, which helps you fly under the radar.
- Start by calculating the “business use percentage” of your home. You can divide by the number of rooms if they’re roughly equal, or calculate the exact percentage of the home’s square footage the office occupies. If you use the second method, common areas such as halls and stairs can be excluded to boost the overall business-use percentage.
- Next, you’ll deduct your business-use percentage of your rent or your mortgage interest and property taxes. Deducting those expenses on your business return can save you more than on your personal return. (For example, if your state and local taxes are higher than $10,000, you’ll sidestep that limit for the portion of property taxes attributable to the home office.)
- You’ll depreciate the business-use percentage of your home’s basis (excluding land) over 39 years as nonresidential property.
- Finally, deduct your business-use percentage of utilities, repairs, insurance, garbage pickup, and even security.
Are there any expenses you can allocate directly to your home office? Maybe you spent extra to renovate the room. Perhaps you have especially high electric bills for home office equipment? You can claim those as “direct” expenses.
It’s also perfectly within reason to deduct the cost of furnishing, carpeting, and decorating your home office. But don’t push your luck! If you pick up a Picasso at auction, you can’t claim it as a deduction because you hang it in your office.
You can use home office expenses to reduce taxable income and self-employment income from your business, but not below zero. If these expenses in a particular year are more than your net income from your business, you can carry forward the loss to future years.
Ultimately, if this all seems like too much work, there’s a new “safe harbor” method that lets you claim a flat $5 per square foot (regardless of your actual expenses) for up to 300 square feet of qualifying home office space (regardless of what percentage it occupies in your home). If you use the safe harbor, you’ll continue to deduct your mortgage interest and property tax on Schedule A. However, you’ll forego any depreciation deduction. And if that deduction reduces your business income below zero, there’s no carrying forward the loss.
The safe harbor is certainly easier than the traditional method. However, using it might not let you claim as much as with the traditional method. The only way to know for sure is to calculate the deduction both ways.
And finally, claiming a home office can also boost your car and truck deductions, because it can minimize or even eliminate nondeductible commuting miles for that business.
February 15th 2019
“I cannot wait to learn the intricate details of all the new tax changes this filing season!” said no one—ever. Fortunately, certified public accountants have been poring over the 500+ pages of the Tax Cuts and Jobs Act of 2017 (TCJA). Considered the largest federal tax reform in 30 years, the main takeaways for business owners include: changes to tax bracket rates and...
5 New Tax Rules
“I cannot wait to learn the intricate details of all the new tax changes this filing season!” said no one—ever. Fortunately, certified public accountants have been poring over the 500+ pages of the Tax Cuts and Jobs Act of 2017 (TCJA). Considered the largest federal tax reform in 30 years, the main takeaways for business owners include: changes to tax bracket rates and income limits; standard deductions nearly doubled; some popular exemptions received new restrictions; and other deductions disappeared altogether.
Despite the 35-day partial government shutdown resulting in a slim January IRS workforce, the IRS doesn’t expect any delays and says its workers will begin processing all filed returns on schedule.
Tax returns supposedly began being processing this week. Below is a brief rundown of five items worth checking into with you CPA:
1. The standard deductions increase will be the greatest change for most taxpayers. Single taxpayers who were eligible for $6,350 as the standard deduction last year can claim a $12,000 deduction for the 2018 tax year. Married couples will go from a $13,000 deduction to $24,000, and standard deductions for head of the household will go from $9,550 to $18,000.
However, personal and dependency exemptions were eliminated (along with 11 other common deductions). So if you’re accustomed to filing itemized deductions, you’ll probably need to run the numbers both ways and consult your CPA on which route is right for you—standard deduction versus itemized.
2. There might be a lot more whining and dining than taxpayers learn of the changes to meals and entertainment deductions. You can still deduct the cost of meals you host with a bona fide business purpose (which means conversations with clients, prospects, referral sources and business colleagues). But in the past, you could deduct entertainment expenses for events such as ball games, concerts or movies, if they took place directly before or after substantial, legitimate discussion directly related to the active conduct of your business. We’re talking deducting face value of tickets to events, food, drinks, parking, taxes and tips. But now that deduction is off the table.
3. New rules on net operating loss (NOL) are likely to raise questions (and possibly blood pressure rates) of business owners. An NOL is the amount by which a taxpayer’s business losses exceed its income. Before now you were allowed to carry it back, and the unused portion could be forwarded to the next year. Not anymore, folks.
For tax years prior to Jan. 1, 2018, NOLS were able to offset 100 percent of taxable income. And you could carry back two years and carry forward for 20 years. Now, however, an NOL can only offset 80 percent of taxable income in any given tax year — and they can no longer be carried back. They can only be carried forward.
4. The standard mileage section of the tax code changed a bit as well. But taxpayers have always had the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. But they may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System or after claiming a Section 179 deduction for that vehicle.
5. Sweeping changes to the qualified business income (QBI) deduction could mean big benefits, depending on the type of business you’re in and the amount of your taxable income. You may be entitled to a deduction of 20 percent of QBI earned, but there are a lot of either or’s involved with this deduction. Depending on your type of business or industry, there are also phase-outs. (For example, attorneys making more than $415K don’t qualify.)
The TCJA lowered the top tax on C corporation income from 35 percent to 21 percent, which is a lot less than the maximum 37 percent tax on pass-through income from sole proprietorships, partnerships and S corporations. To equalize the tax treatment between taxable and pass-through businesses, the new QBI income lets you deduct 20 percent of that income (calculated on an activity-by-activity basis, from your taxable income for the year).
Remember, consult your tax professional on how the QBI deduction and other items outlined above could affect you now and how to manage them.
If you picked up pointers here, perfect! Just remember: We’re all navigating uncharted territory, so please be sure to thank your CPA.
January 17th 2019
Utilizing Liscio: Liscio is a tool that we are transitioning to in place of the Allman Johnson portal and email. Email is becoming less and less secure and the portal has proven to be a little difficult for many of our clients, so we’re making the...
Liscio is a tool that we are transitioning to in place of the Allman Johnson portal and email. Email is becoming less and less secure and the portal has proven to be a little difficult for many of our clients, so we’re making the switch to Liscio, which is more secure and user-friendly. Liscio can be used from your desktop computer or from the LiscioPro app on your phone.
You will be using Liscio for one of two purposes; uploading a file and/or tax documents and messaging staff. Instead of using two forms of communication (portal and email) you can use one platform to do both while doing it securely.
1. To upload a file or message an employee, go to the top left-hand section of your Navigation Panel to the “Add New” tab and select either option.
*If you are using the mobile app, the navigation panel is slightly different. There isn’t a “Add New” section on the mobile app. You can simply select from the navigation panel “upload a file” or “new message”.
2. Messaging Staff
Step 1: Click +Message.
Step 2: Click “To” Field; enter recipient and account.
Step 3: Enter subject line and description.
Step 4: Drag and drop files or click browse.
Step 5: Click Send.
3. Uploading A File
Step 1: Click the +Upload File button.
Step 2: Select an account that this file is for (If you don’t have a business, account will be under your name).
Step 3: Select the year for the file. (If it relates to 2017 tax year, select 2017).
Step 4: Add an associated tag (this feature is for future search references).
Step 5: Drag and Drop or browse the file you wish to upload.
Step 6: Click Upload.
Tip #1: Any files that have been uploaded by you or a staff member will be located in your FILES section on the navigation panel. This will include organizer, tax returns etc.
Tip #2: If you forget your password while logging into your account, please click on “Forget Password” and then “Send Magic Link”. This will prompt Liscio to send you a link to your email. You will not need to change your password.
As you can see, Liscio is simple to use. However, we understand it takes a little time to get used to new websites and technology. If you ever need assistance, please contact Kristin or Melinda at the Allman Johnson office.
Kristin- Office@allmanjohnson.com; 317-843-1040 ext. 114
Melinda- MLain@allmanjohnson.com; 317-843-1040 ext. 101
January 10th 2019
To be or not to be…Or should I say to itemize or not to itemize? Under prior tax law the year end planning advice was fairly simple: defer income and accelerate deductions. Except of course if the rates will be lower next year. For 2018 the rates are lower, but there are some other changes that make the simple answer for...
To Itemize or Not to Itemize?
To be or not to be…Or should I say to itemize or not to itemize?
Under prior tax law the year end planning advice was fairly simple: defer income and accelerate deductions. Except of course if the rates will be lower next year. For 2018 the rates are lower, but there are some other changes that make the simple answer for year-end tax planning not so simple.
In fact, the new law has drastically changed the way we approach tax planning. Under the new law the most effective method for tax planning is a multi-year approach. Planning over several years can insure you get the most out of the opportunities provided by the new law. In addition, through a multi-year planning approach we can avoid many of the pitfalls of the new law as well.
Some folks will undoubtedly come close to the new standard deduction with the changes to the itemized deductions. One of the biggest changes is in the doubling of the standard deduction
|Married Filing a Joint Return||13,000||24,000|
|Single or Married Filing Seperate||6,500||13,000|
|Head of Household||9,550||18,000|
If your past itemized deductions were over the new standard deduction you will likely continue to itemize unless the other changes* noted below effect your total itemized deductions.
But what about those of you that seemingly just changed from Itemized to standard deductions? Is there anything you can do? What if your itemized deductions typically came in above the old standard deduction but below the new standard deduction? Are you relegated to only taking the standard deduction moving forward? Not necessarily, in years past folks close to the standard deduction with itemized deduction were able to “bunch” deductions to allow them to get over the standard every other year.
The technique is somewhat simple but requires multi-year planning to pull it off. The fly in the ointment moving forward is that some techniques that worked in the past may not work under the new laws. Bunching of the state tax deduction may not work if the “bunched“ year state and local taxes exceed $10,000 for the bunched year. Charitable deductions are most effectively “bunched” by using certain investment funds (i.e. donor advised funds). You receive a deduction for the year in which you make the contribution, rather than the year of distribution of the funds.
Total benefit by bunching deductions over two years is $58,000 of deductions (40,500+ 17,500)
Obviously, this example was created to demonstrate that the use of multi-year tax planning can work for certain taxpayers. Your results may vary depending on your situation. However, for those taxpayers that fall into that middle area between prior years itemizing and current year standard deductions multi-year planning could save you significant tax dollars by bunching your deductions in alternating years
|DEDUCTIONS||CURRENT||CURRENT NEW STANDARD||BUNCHING YEAR 1||BUNCHING YEAR 2|
|Real Estate Tax||$2,000||$2,000||$2,000 + $2,000 prepaid||$0 all prepaid year 1|
|State Tax||$3,000||$3,000||$3,000 + $3,000||$0 all prepaid year 1|
|Chairtable Donations||$12,000||$12,000||$12,000 + $12,000 to Donor Advised Fund||$0 Deducted Donation paid from Donar Advised Fund year 1-12K|
|Total Itemized Deductions||$23,500||$23,500||$40,500||$6,500|
|Benefit From Itemizing||$10,500||$0 - Gain benefit of $500 from new standard||Tax savings on $16,500 of itemized deduction ($40,500-$24,000)||
Claim Standard - benefit $17,500($24,000-$6,500)
*Other changes to Itemized Deductions mentioned above that effect whether a person can itemize:
- Limitation of the State and Local Tax deduction to $10,000.
- The new mortgage interest deduction limitations and the elimination of the deduction for home equity interest. New mortgages (After December 15, 2017) deduction is limited to interest on $750,000 of principal. The limit is still 1 million for mortgages prior to December 15, 2017.
- Complete elimination of Itemized deductions subject to the 2% limitation of adjusted gross income.
December 14th 2018
We’ve all heard the stories about cyber security compromises and the risk of identity theft. As your trusted advisors, we are very aware of the risks and take every precaution to make sure your data remains safe and secure. High levels of sensitive information make the accounting profession a natural target, which is why we are working hard to keep your information...
Data Security – Priority One - Liscio
We’ve all heard the stories about cyber security compromises and the risk of identity theft. As your trusted advisors, we are very aware of the risks and take every precaution to make sure your data remains safe and secure.
High levels of sensitive information make the accounting profession a natural target, which is why we are working hard to keep your information safe. We are always researching new technology and implementing process improvements to ward off security breaches and stay a step ahead of the criminals.
The latest technology update is testament to our dedication in this area, because over 90% of security breaches start with a simple email. Malware and Ransomware are easily attached to emails. Oftentimes they are silently added to documents and transmitted unknowingly. In addition, Social Engineering and Phishing scams have evolved so that they very closely resemble an authentic email message from our clients. Any of these major email attacks could shut down operations, leaving us vulnerable and unable to service our client’s needs at deadline time. That’s why it’s important to move as much as possible out of email. Today, we are stepping up the security ante by moving away from portals and into our new military-grade, multi-factor authentication security platform – Liscio.
Effective January 1, 2019 we will eliminate portals as the primary mode of document exchange. Liscio will serve as our core client communication platform – which is available both from our website (within the Client Center) and via the mobile app for your convenience.
What can you expect from this performance upgrade? Trusted and secure document sharing and communications between our office and you. Since Liscio is an invite only, closed system, it is highly secure. You do not need to worry about transmitting documents that contain your sensitive and personal information. Liscio also provides us with a dedicated channel and less room to miss your vital communications with us – i.e. not lost among the countless junk emails we all receive daily. Liscio also provides a quicker method of finding your specific documents and messages with upgraded sort features that email just can’t touch.
We take the security of our clients’ data seriously, which is why we are moving to the ultra-secure Liscio platform. We understand that this may cause initial disruption in processes, but we also know that your security must be our first priority. We promise to make this transition as smooth and pain-free as possible.
December 10th 2018
2019 - Changes to Come
It is exciting to celebrate this holiday season and ring in the New Year with you! We feel privileged that you have entrusted us to advise you in how best to grow your business and personal finances. We love seeing those goals come to fruition.
Over the past few months we have evaluated how to better serve you. The two main areas of focus are communication and security. Luckily, we have found one solution for both concerns! Starting January 2019, we will no longer be receiving attachments via email and we will be shutting off the file exchange portion of the portal, accessed through our website. You will still be able to view past tax returns for the time being. The good news, we have something better! Our firm is switching to a secure communication and document sharing platform called Liscio.
Using Liscio, you can upload documents without having to worry about blocking out social security numbers or other personal information you don’t want stolen. You will also have the ability to directly message with any (or all) of our team. Another great feature of Liscio, all communication and document sharing are now in one location, alleviating the need for the clunky website portal and insecure email. You can use Liscio on a desktop computer or you can download the LiscioPro app on your smart phone. We know you are busy and some of you may be on-the-go, so downloading the mobile app is a great solution.
The Allman Johnson portal was very difficult and inconvenient if you needed to reset your password. With Liscio, if you forget your password, all you do is click “send magic link” and it will send you a link in your email to login to Liscio. Simple as that!
We understand that new systems can be challenging and that there will be growing pains. We are more than happy to assist you in any way to help you feel comfortable using Liscio. We will be sending you an email along with an invite to Liscio. Please be on the lookout for those in your email. All that’s required to get started on Liscio is to verify your email, accept the terms and conditions, and create a password. You can find Liscio in the Client Center on the Allman Johnson website. If you want to get a jump start on signing up, you can do so directly from the Allman Johnson website.
Other Important News:
In 2019, the organizer will be located on your Liscio account. You will be able to find any document that we upload to you in the FILES section of your Liscio account. This is also where we will upload your tax returns. In the past, these items have been located on the Allman Johnson portal. Older returns are still available via our website.
Allman Johnson CPAs & Advisors
February 14th 2018
It's February, and love is in the air. Restaurants are advertising intimate specials for two. Florists are rolling out the red carpet. And in the greeting card racks across the country, Hallmark's most accomplished poets are debuting their new verse. We're talking about Valentine's Day, of course. 62% of Americans say they'll celebrate the occasion. (Of course, that means the rest of...
Romantic Tax Collectors Love Valentine's Day Too
It's February, and love is in the air. Restaurants are advertising intimate specials for two. Florists are rolling out the red carpet. And in the greeting card racks across the country, Hallmark's most accomplished poets are debuting their new verse.
We're talking about Valentine's Day, of course. 62% of Americans say they'll celebrate the occasion. (Of course, that means the rest of us will just try to keep our heads down and pretend it's just another blah February day.) But with all those Cupid's arrows flying around, shouldn't the tax man get a little love, too?
The National Retail Federation estimates that Americans will spend $19.6 billion this Valentine's Day. That includes $4.7 billion on jewelry (for the truly lucky ones), $3.7 on going out, $2 billion on flowers (including, naturally, 250 million roses), $1.7 billion on chocolate and candy, $894 million on greeting cards, and $751 million on pets. That's all before we get to the lingerie, champagne, and candles. (Guys, we know you don't care for scented candles. Just think of them as proof that your Valentine trusts you with fire.)
Naturally, all that spending means taxes. The average sales tax rate here in the U.S. is 8.454%, which suggests that state and local governments will collect over $1.5 billion. Of course calculating that tax isn't always as easy as multiplying your purchase amount by the local rate. Some states define candy as "groceries" or "unprepared foods" and tax them at lower rates or exempt them completely. (True love may be pure and simple. Taxes, not so much.)
The real action comes once you and your Valentine get married. For years, the so-called "marriage penalty" has taxed married couples at a higher rate than single filers earning the same combined income. The Tax Cuts and Jobs Act eliminates that penalty for couples earning up to $400,000. But above that amount, it bites hard. Singles don't hit the 37% top tax bracket until $500,000 of taxable income, while joint filers hit it at just $600,000. For a couple earning $500,000 each, that's a difference of $8,000 in total tax — enough to buy a lot of roses!
Of course, there are tax advantages to tying the knot, too. You can make unlimited cash gifts to your spouse. Your estate tax unified credit doubles, to $11.2 million. (Maybe that's why rich old geezers marry younger women . . . yeah, they do it for the tax planning!) You can make twice as much tax-free profit selling your home than if you're single. What's not to love about that?
And if your marriage doesn't go as planned? You can still console yourself with tax-advantaged alimony payments — at least, for agreements finalized before the end of 2018. (You know why divorce is so expensive? Because it's worth it!) You might also get a tax deduction if you donate all the stuff your ex gave you to charity! No sense cluttering up your house with painful memories, right?
Here's something we know you'll love, no matter what your relationship status: keeping more for your sweetheart this holiday. The key to making it work, of course, is planning. So call us when you're ready to pay less tax every day!
January 17th 2018
In 2012, the singer Whitney Houston died suddenly, drowning in a hotel bathroom after years of battling drug addiction. Yet the world will always treasure her musical legacy. The Guinness Book of World Records reports that she was the most awarded female artist of all time, with two Emmys, six Grammys, 30 Billboard Music Awards, and 22 American Music Awards, among 400+ awards. Rolling Stone...
How Will I Know?
In 2012, the singer Whitney Houston died suddenly, drowning in a hotel bathroom after years of battling drug addiction. Yet the world will always treasure her musical legacy. The Guinness Book of World Records reports that she was the most awarded female artist of all time, with two Emmys, six Grammys, 30 Billboard Music Awards, and 22 American Music Awards, among 400+ awards. Rolling Stone listed her debut album as one of the 500 greatest albums of all time. And VH1 put her number three on their "greatest women of the video age" list, behind Madonna and Janet Jackson.
Houston also left a considerable financial legacy, estimated at $20 million. She saved all her estate in trust for her only child, Bobbi Kristina Brown, with instructions to release 10% when Brown reached age 21, another sixth at age 25, and the remainder at age 30. (Brown died in 2015 from her own drug overdose, leaving the ultimate fate of the estate in the hands of lawyers, who are sure to bill lots of hours.)
But Houston's estate includes far more than cash and securities. It also includes her music catalog, digital performance royalties, movie and television residuals, and "publicity rights," meaning her right to control the commercial use of her name, image, and likeness. Now, it's easy to value assets like cash or stocks. But valuing the music catalog involves estimating the amount of future royalties, and valuing publicity rights is even more subjective.
Naturally, the IRS gets so emotional about those sorts of intangible legacies, especially with estate tax rates in 2012 running at 40% on amounts over $5,120,000. In fact, estate tax returns are audited more than any other type, with the IRS examining over 30% of estates reporting $10 million or more in assets. (Does that mean estate taxes are the tax man's "Greatest Love of All"?) These disputes often come down to a battle of valuations, which makes a good appraiser all the man you need.
The IRS determined that Houston's representatives underestimated the value of her intangible assets by $22.6 million. They imposed a $7.92 million deficiency and $3.17 million in penalties. The parties were scheduled to go to trial next month. However, on December 26, 2017, the estate filed documents agreeing to settle for $2,275,366. ("Didn't We Almost Have It All," we can imagine the folks at the IRS humming as they deposit the estate's check.)
This isn't the first time the IRS has battled over pop star publicity rights. Executors for Michael Jackson's estate valued his at just $2,105, which essentially argues that the King of Pop's bizarre controversies and misadventures had rendered his image essentially worthless. Attorneys at the IRS told them to beat it, valuing those rights at $434 million. That case is still working its way through court — last month, a Tax Court judge denied the IRS's bid to provide additional evidence to support seeking penalties up to 40% of the allegedly understated tax.
The Tax Cuts and Jobs Act of 2017 doubles the estate tax "unified credit" to $11.2 million per person for 2018. This should cut the number of estates filing returns to less than 4,000 per year. But careful planning is still in order to make sure your legacy goes where you want it going. So call us when you're ready to plan, and let's make beautiful (financial) music together!
January 14th 2018
In 2016, SyFy debuted a new show called Incorporated about a dystopian future where corporations, not governments, rule the world. If that nightmare ever comes true, we all know which real-world corporation will rule them all. It's Apple, of course, which just took the shrink-wrap off their $5 billion ring-shaped headquarters in Cupertino, CA and is on the verge of becoming the world's first...
iTaxes Version 38 Billion.0
In 2016, SyFy debuted a new show called Incorporated about a dystopian future where corporations, not governments, rule the world. If that nightmare ever comes true, we all know which real-world corporation will rule them all. It's Apple, of course, which just took the shrink-wrap off their $5 billion ring-shaped headquarters in Cupertino, CA and is on the verge of becoming the world's first trillion-dollar company.
Odds are good that you've got an iDevice of some sort in your home, office, or pocket. Apple's product design geniuses use crack-like design and technology that keeps users hooked like heroin addicts, to make Apple the most valuable corporation in the world. But what you may not know is how Apple's financial geniuses use proactive tax planning to make their company even more valuable. And now, the Tax Cuts and Jobs Act has inspired them to act again.
Apple has scattered their manufacturing operations throughout the world to take advantage of lower costs overseas. (You think your 10-year-old's science fair project is special? Big deal — 10-year-olds in China are making iPhones!) This has prompted various entertaining debates over the ethics and politics of offshoring, which we won't presume to touch here.
Apple hasn't just offshored manufacturing operations to cut manufacturing costs. They've also offshored their profits, to take advantage of tax rates that are lower than our own traditional 35%. This involves strategies with names like the "double Irish with a Dutch Strategy," which sounds like something you'd see figure skaters attempting at the upcoming Winter Olympics. Apple's Irish subsidiary, Apple Operations International, earned $30 billion from 2009-2012, and didn't even file tax returns for those years.
Hoarding cash before the IRS gets to grab 35% of it doesn't mean stuffing it under some sort of supersized Irish mattress. The parent company borrows their own subsidiary's cash, deducts 35% of the interest they pay for it here in the U.S., and pay tax on that interest at just 12.5% in Ireland, shifting even more money out of IRS reach.
Now the Tax Cuts and Jobs Act has cut the rate on Apple's iProfits to just 21%. It even includes a bonus "get out of jail free" card for companies with cash overseas, letting them pay a one-time 15.5% rate to load those bales of cash on a plane and bring them home. So Apple is repatriating $252 billion, and writing the IRS a $38 billion check — enough to finance the entire government of Wisconsin for a year, with enough left over to pay for Jacksonville or St. Louis, too. But that's still $43 billion less than paying the 35% on the full amount.
And what will Apple do with their iSavings? Throw a party, of course! They've announced plans to hire 20,000 new employees, build another major domestic campus, and boost R&D to diversify away from the iPhone. They'll also use billions more for dividends (which put cash in shareholders' hands) and share buybacks (which also rewards them by pushing prices up).
We realize you don't have $252 billion to plan for. But that doesn't mean you can't profit from planning, too. So give us a call when you're ready to take full advantage of the new tax law and see how much iCash we can put in your pocket!
December 27th 2017
On Sunday, October 30, 1938, Mercury Radio Theatre fans, who were listening to Ramon Racquello and His Orchestra, were interrupted by a news broadcast reporting an odd explosion on the planet Mars. Soon after, they learned that a cylindrical object had fallen on a farm in Grovers Mills, New Jersey. The radio audience listened in horror as a pulsating Martian emerged from the cylinder and...
We Now Interrupt This Broadcast . . .
On Sunday, October 30, 1938, Mercury Radio Theatre fans, who were listening to Ramon Racquello and His Orchestra, were interrupted by a news broadcast reporting an odd explosion on the planet Mars. Soon after, they learned that a cylindrical object had fallen on a farm in Grovers Mills, New Jersey. The radio audience listened in horror as a pulsating Martian emerged from the cylinder and obliterated the crowd with heat rays. Soon, an entire army of Martians had invaded New York, and very real panic had spread across the country.
Last week, something a bit similar happened in the tax world. (Well, except for the Martians, heat rays, and destruction of Gotham.) After just six weeks of consideration, the House and Senate passed the Tax Cuts and Jobs Act of 2017, the biggest restructuring of the tax code in 31 years.
We don't usually use these emails to discuss "hard news" like the new tax bill. It's much more fun to walk through the "Twelve days of Taxmas," or how celebrities use offshore tax havens, or harken back to taxes in the 1980s as we enjoy Season Two of Netflix's Stranger Things. But this new tax bill is simply too big to ignore. And so we interrupt our usual broadcast of fun tax stories for something a bit more serious.
We shouldn't need to tell you much about the nuts and bolts of the new law — the lower tax rates, lower deductions, and new "qualified business income" rules for pass-through businesses. The news is already full of those discussions. Over the coming days and weeks, we'll be putting together material explining how the new bill could affect you.
But we're going to do things a little different from everybody else. Most of those news outlets will be writing about how much you're going to owe under the new law. And that's important. But we're going to focus our effort on how you can pay less. And in the end, that service is even more important. Most tax professionals do a perfectly good job of putting the "right" numbers in the "right" boxes on the "right" forms. But then they call it a day. Our real value comes from delivering the proactive concepts and strategies that most tax and financial advisors simply overlook.
Of course, we'll also be highlighting some of the more absurd aspects of the new law. For example . . . under the old law, you could exclude a whopping $20 of income per month for expenses related to riding your bike to work, so long as you weren't getting other pretax transit benefits. The new law lets the air out of that benefit. And how much will putting a nail in that benefit save the Treasury? Austin Powers fans, channel your best Dr Evil voice and say it with me . . . "one . . . million . . . dollars." A rounding error, at best.
Here's another one you might like a little more. Under the old law, Code Section 162 said that members of Congress could deduct up to $3,000 per year for their living expenses while they’re away from their districts. At this point, though, Congressional net worths are hitting all-time highs (Montana Rep. Greg Gianforte, who started two software companies, is worth $315 million). And congressional approval ratings are hitting all-time lows, hovering somewhere around 11%. So the new law eliminates that little boondoggle.
This is the last time we'll be writing to you in 2017, and 2018 promises to be a busy year, full of opportunity and promise. So count on us to help you navigate the new rules, as you ring in the New Year. And don't forget, we'll be here for your family, friends, and colleagues, too!
December 20th 2017
Every year, PNC Bank publishes their "Christmas Price Index" to track the cost of the Twelve Days of Christmas. For 2017, it's a hefty $157,558. (And you thought your holiday spending was out of control!) The index may not be completely accurate — for example, the ten lords-a-leaping are valued using...
The Twelve Days of Taxmas
Every year, PNC Bank publishes their "Christmas Price Index" to track the cost of the Twelve Days of Christmas. For 2017, it's a hefty $157,558. (And you thought your holiday spending was out of control!) The index may not be completely accurate — for example, the ten lords-a-leaping are valued using the cost of male ballet dancers, rather than actual lords, and the eight maids-a-milking don't include eight actual cows. But still, it got us wondering . . . what sort of taxes are we looking at on the whole affair?
Twelve drummers drumming and eleven pipers piping make quite a racket every holiday season. Hiring all that help will stir up a cacophony of payroll taxes!
Ten lords may look perfectly happy while they're leaping. But surely they must pay a king's ransom in income taxes — after all, they are lords!
Nine ladies dancing make a lovely sight at Christmas time — especially if they're Rockettes. They also pay a cabaret tax for the privilege of displaying their talent.
Eight maids-a-milking help make sure we have plenty of tasty eggnog to drink. Good thing so many states offer dairy tax credits to spur the cows on to higher holiday production!
Seven swans-a-swimming? Six geese-a-laying? If we accept the rule of thumb that two birds per acre of pond is a manageable number, then we're looking at some serious property taxes to host our holiday flock!
Who doesn't want five gold rings under the tree? But selling those rings can be an expensive proposition. Remember, jewelry held for personal use is still subject to 20% tax on long-term capital gains, plus an extra 3.8% "net investment income tax"!
Four calling birds use a lot of cell phone minutes over twelve days. (They're calling birds, so unlimited texting won't help.) Naturally, that means a 5.82% federal excise tax, plus state and local sales tax too.
Three French hens add a sophisticated "continental" touch to anyone's holiday festivities. But don't forget the import duties you pay to bring foreign livestock into the country!
Two turtle doves are known among bird watchers for forming strong "pair bonds," which makes them a symbol of devoted love. (That's why they're in the song.) Too bad that means they pay that pesky marriage penalty that hits high-income couples who file jointly! (Okay, we know this this one's a stretch. But we've got twelve days of taxes to fill here, so what can we do?)
Nothing says "Christmas" like a partridge in a pear tree. And our tax code is full of juicy incentives for growing pear trees. You can deduct operating expenses associated with your crop; you can depreciate equipment and land improvements you use to manage your groves; and you can even take generous charitable deductions for rights you give up for conservation easements. Why, the tax savings alone should be more than enough to pay for the partridge!
Yes, even Twelve Days of Christmas just means twelve more opportunities for the taxman. So here's wishing you and your family the best this holiday season. We'll be back in 2018 to make sure you pay as little tax as possible, not just during the holidays, but all year long!
December 13th 2017
Your kids have finally finished eating their Halloween candy, which means that the real holidays are right around the corner. But before you sit down to open presents, December 16th marks the 244th anniversary of an important holiday in tax history — a pop-up costume ball in Boston Harbor called the Boston Tea Party. From 1698 through 1767, Britain's Parliament passed a series...
A Different Kind of Holiday Party
Your kids have finally finished eating their Halloween candy, which means that the real holidays are right around the corner. But before you sit down to open presents, December 16th marks the 244th anniversary of an important holiday in tax history — a pop-up costume ball in Boston Harbor called the Boston Tea Party.
From 1698 through 1767, Britain's Parliament passed a series of laws giving the East India Company a monopoly on the British tea trade, forcing the colonies to buy their tea from British wholesalers, and slapping hefty taxes on it all. But Dutch traders, who paid no tax, could sell their tea for less, costing the East India Company a fortune. (If you remember Miami Vice in the 1980s, try picturing a colonial-era Crockett and Tubbs, dressed in fly white buckskins, chasing Dutch bootleggers in a sleek Italian brigantine.)
In 1767, Parliament passed the Indemnity Act to lower the tax on tea to compete with the Dutch. (Earl Gray was just three years old, so he didn't vote.) But they needed a "payfor" to make up the lost revenue, so they brewed up the Townshend Acts taxing colonial imports, including tea. (Hmmmm . . . sounds like the sort of horse-trading today's Congress is up to right now with the Tax Cuts and Jobs Act.) Five years later, the Indemnity Act expired, and everyone was back where they started. (Sort of like what happened in 2013 when the Bush tax cuts expired . . . . )
The Tea Act of 1773 brought things to a head. The new law actually lowered the price of tea to undercut the smugglers. But the colonists still hated Parliament taxing them without their consent. They hated how England used those taxes to pay colonial governors and judges, thus insulating them from local influence. And that's where things stood in November, 1773, as the tea ship Dartmouth sailed into a Boston Harbor steeped in resentment and controversy.
British law required the shipper to unload and pay the tax within 20 days. But colonists, who gathered by the thousands, were determined to prevent that. On the night of December 16, the final deadline, a group of 30 to 130 of them boarded the Dartmouth and two more ships. A few of them sported elaborate Mohawk warrior costumes to hide their faces and show their loyalty to American identity. They spent three hours dumping 342 chests of tea into the water. The next day, future President John Adams wrote in his diary:
"There is a Dignity, a Majesty, a Sublimity, in this last Effort of the Patriots, that I greatly admire . . . . This Destruction of the Tea is so bold, so daring, so firm, intrepid and inflexible, and it must have so important Consequences, and so lasting, that I cant but consider it as an Epocha in History."
The Tea Party set all sorts of consequences in motion besides the obvious "American Revolution" thing. (Does that remind you of Taylor Swift's song, "We Are Never Ever Getting Back Together"?) If you're a coffee drinker, for example, you should know that coffee first became popular here as an alternative to "unpatriotic" tea. (Sort of like renaming french fries "freedom fries" during the Second Iraq War . . . . )
244 years later, we still resent paying taxes we don't have to pay. The good news is, you don't have to don a Mohawk headdress and row out into the middle of the harbor for three hours of creative vandalism to pay less. You just need a plan. So call us when you're ready to save, and let us give you something to celebrate!
December 6th 2017
Two hundred and forty one years ago, we declared our independence from Mother England — over taxes, of course. But here on our side of the pond, we've never completely lost our affection for all things British. We applauded as the Queen celebrated her 70th wedding anniversary. Netflix fans who just finished binge-watching Stranger Things are eagerly awaiting Season Two of The Crown. And...
Area Actress to Wed Ex-Soldier
Two hundred and forty one years ago, we declared our independence from Mother England — over taxes, of course. But here on our side of the pond, we've never completely lost our affection for all things British. We applauded as the Queen celebrated her 70th wedding anniversary. Netflix fans who just finished binge-watching Stranger Things are eagerly awaiting Season Two of The Crown. And now we've learned that Prince Harry and his longtime girlfriend, actress Meghan Markle, are getting married in May.
Now, Harry may be just fifth in line for the throne, and about to be bumped down to sixth when Princess Kate gives birth to her third child next spring. But a royal wedding is still a Very Big Deal. There's going to be lots of work to keep the couple knackered out for months to come. That includes a guest list, a gown, and flowers. And of course there will tax questions, too.
Here's the issue: Markle isn't a Brit. She's a Yank. Buckingham Palace has already announced that Markle will become a British citizen, which involves passing a test with questions like "What did the Statute of Rhuddlan in 1284 lay the basis for?" and, "Who or what is Vindolanda"? But that transition will certainly complicate her finances, and possibly the rest of the royal family's, whether she says cheerio to her American citizenship or not.
Giving up her U.S. passport would be a simple but possibly pricey proposition. There's no magic to it: you make an appointment at the nearest embassy, sign some forms, and take an Oath of Renunciation. There's a $2,350 fee to process the paperwork, but that's low enough that she could probably add it to her wedding registry and count on a generous Member of Parliament, or maybe a lesser Marchioness, pick it up for her.
The real problem with expatriating is the bloody exit tax. If your net worth is over $2 million, or your average annual income for the five years before you leave tops $162,000, you'll owe tax on any appreciated assets you own, calculated as if you had sold them on the day you leave. That could make it frightfully expensive to move into a palace!
Things get more complicated if Markle keeps her U.S. citizenship. She'll still owe U.S. tax on her worldwide income. And she can't hide foreign holdings from the IRS. If she keeps more than $300,000 in assets abroad, she'll have to file Form 8938 reporting them. (And, really, what's the point of being "Her Royal Highness Princess Henry of Wales" if she's not going to have more than $300,000 in assets?)
If Her Royal Yankee Highness hold anything jointly with Harry, those U.S. filings could reveal assets the Crown prefers keeping confidential. We know that Harry inherited half of his mother, Princess Diana's £21.5 million estate (roughly $28.5 million), and he shares a £3.5 million allowance with his brother. But the royals work hard to keep the bulk of their finances private. The recent "Paradise Papers" leak revealed that Harry's grandmum the Queen benefits from investments the Duchy of Lancaster holds in the Cayman Islands and Bermuda.
You probably thought that marrying a royal would solve your financial problems, not create new ones. But life is full of surprises, even for princesses. So let us propose a jolly good solution: a plan for paying the legal minimum, no matter who you marry! Call us when you're ready to save, and take a few quid to treat the queen to a cuppa!
November 29th 2017
April 15 hasn't always been the national exercise in self-flagellation that it is today. Up until the 1940s, you could just waltz into your local IRS office and they would do your taxes for you. But those days have long since passed. You're still welcome to do it yourself, if you need more stress in your life. But how will you know if you're paying too much? Even software like TurboTax can't...
Good Guys Share $175 Million Refund
April 15 hasn't always been the national exercise in self-flagellation that it is today. Up until the 1940s, you could just waltz into your local IRS office and they would do your taxes for you. But those days have long since passed. You're still welcome to do it yourself, if you need more stress in your life. But how will you know if you're paying too much? Even software like TurboTax can't guarantee you'll get it right. If you don't know how to use it, the program just helps you make the same expensive mistakes faster than when you made them with paper and pencils.
If you're like most Americans, you just throw up your hands and call a pro. That begs a new question: who to call? Certified Public Accountants and Enrolled Agents have traditionally dominated the field. But up until 2010, anyone with a pencil could call himself a tax preparer. (Most of them use computers now — but, surprisingly, not all. Hey, some people still carry flip phones, too.) That seems like an obvious vacuum in today's regulatory environment, considering that in most places, you need a license just to catch a fish. And we all know bureaucracy abhors a vacuum.
In 2009, the IRS decided to do something. After a series of public forums and comments, they launched the Registered Tax Return Preparer (RTRP) program. The new rules required preparers to: 1) sign up for a Preparer Tax Identification Number, 2) pass a 2.5 hour test, and 3) complete 15 hours of continuing education per year. Naturally, the IRS charged a fee for the program, which started at $64.25 per year. And they based their authority to do it all on an obscure 1884 law regulating representatives of civil war soldiers looking for compensation for dead horses.
Everyone was happy with the RTRP, except the people subject to the new rules (and maybe those long-dead horses). Preparers felt like they were being forced to take a test to prove they could do something they had done, in some cases, for decades. So three of them sued to shut down the program. And they won — the court agreed that the 1884 law didn't give the IRS authority to regulate an industry that didn't even exist when it was passed. (Oops.)
The IRS suspended the RTRP program. But they kept charging the PTIN fees, even though the program the fees were supposed to finance had ended. So, one year later, a different group of preparers filed another suit to recover those fees.
Once again, the court ruled in their favor. This June, the court decided that PTINs aren't a "service or thing of value" justifying a fee. The IRS can't charge fees for PTINs, "because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority." (Don't hold your breath waiting for Congress to give it to them.) And yes, the IRS has to give back all the PTIN fees they've collected. That was $175 million when the plaintiffs filed their complaint; but it could be as high as $300 million now.
Chalk one up for the good guys, right? Well, sure. But here's the real lesson: most tax preparers, credentialed or not, focus on putting the "right" numbers in the "right" boxes on the "right" forms. They do a great job of telling you how much you owe — but nothing about how to pay less. And that has everything to do with attitude, not credentials. So call us when you're ready to save — and remember, we're here for your family, friends, and colleagues, too!
November 22nd 2017
They say that "what goes up must come down." But that's not true when it comes to college costs. U.S. News reports the average private college tuition stood at $16,233 back in 1997-98 — roughly $24,973 in 2017 dollars. But the same...
Ivy League Tax Problems
They say that "what goes up must come down." But that's not true when it comes to college costs. U.S. News reports the average private college tuition stood at $16,233 back in 1997-98 — roughly $24,973 in 2017 dollars. But the same tuition today costs $41,727. And that's before pricing in luxuries like, you know, meals, and a place to sleep. In-state college costs are rising even faster as legislatures cut budgets for higher education. That means colleges are increasingly turning to alternate funding sources, including their endowments.
In academia, though, as in so many other parts of our "winner take all" society, there's the 1%, and there's everyone else. America's richest 800 colleges and universities hold over $500 billion in endowments, which sounds like there should be plenty to help supplement tuition and fees. But the top 1% of schools hold over $10 billion each, and 11% of schools hog 74% of those assets. That leaves the Faber Colleges of the world essentially fighting over scraps. ("Knowledge is good.")
Now, the Phi Beta Kappas who write our tax code have turned their green eyeshades towards those mammoth pools of tax-free wealth. Both the House and Senate tax bills working through Congress would impose a 1.4% excise tax on net investment income of private colleges holding more than $250,000 per student. That group includes about 70 schools, including obvious targets like Harvard, Yale, and Princeton. At the same time, the proposal spares public school systems with big endowments like the Universities of Texas ($25.4 billion), Michigan ($9.7 billion), and California ($7.4 billion).
It's true that if any schools have "too much money" (LOL), it's the top-shelf Ivies. Harvard's endowment started in 1638 with £779 and 400 books. Over the next 379 years, it's grown to over $37 billion (and 16 million books), leading critics to call it a hedge fund with a university attached. In 2015 that fund grew by just 5.8%, compared to rival Yale's 11.5%. But Harvard Management Company paid its chief executive a whopping $14.9 million, with his deputy taking home $11.6 million. (And you thought college football coaches were overpaid!)
Academic endowments have grown so large that they're starting to use some of the same tax strategies as the richest individuals. The New York Times recently exposed how colleges use offshore entities to boost earnings, including "blocker corporations" that let them avoid tax on debt-financed "unrelated business taxable income." (Trust us, those UBTI rules are even more boring and technical than they sound.)
But naturally, academics are irate at the proposal, rolling up their leather-patched tweed sleeves and prepping for a (genteel) fight. "Endowments support substantial student aid and student service programs, and provide funding for instruction, research, and for building and maintaining classrooms, labs, libraries, and other facilities," said the Association of American Universities. At Princeton (the #1 target with $2.5 million per student), undergraduates from families earning under $56,000 pay no tuition, room, or board, while those from families earning under $160,000 pay no tuition.
Here's the good news. You don't have to be an Ivy League university — or even have an Ivy League education — to save big on your tax bill. You just need a proactive plan. So call us when you're ready for some real-world lessons on how to pay less!
November 20th 2017
“Hoosier Hospitality” is at its highest during the holiday season, especially for nonprofit organizations. Pageants, food kitchens, holiday craft shows, toy collections, bake sales, and other activities send volunteers bustling to the stores for supplies. During the helter-skelter of the holidays, it’s sometimes difficult to remember the rules regarding sale...
Sales Tax Exemptions for Nonprofits
“Hoosier Hospitality” is at its highest during the holiday season, especially for nonprofit organizations.
Pageants, food kitchens, holiday craft shows, toy collections, bake sales, and other activities send volunteers bustling to the stores for supplies.
During the helter-skelter of the holidays, it’s sometimes difficult to remember the rules regarding sale tax exemptions. Here’s a quick refresher.
Is the organization a qualified nonprofit?
Generally, if the organization buys and sells personal property but does not make a financial profit, it would be classified as a nonprofit corporation. To register as a nonprofit and qualify to receive sales tax exemptions, the organization must:
• Secure a nonprofit, or tax-exempt, status from the Internal Revenue Service (IRS). The IRS will provide the organization with a Federal Determination letter showing the exemption from federal tax.
• To receive an Indiana sales tax exemption, the organization must file a Nonprofit Application for Sales Tax Exemption (Form NP-20A) and annually file a Nonprofit Organization’s Annual Report (Form NP-20) with the Indiana Department of Revenue.
Nonprofits making sales
If a qualified non-profit organization sells items for 30 days or less during a calendar year (it doesn’t matter if days are consecutive or not), sales will be exempt from Indiana’s seven percent sales tax.
If the organization engages in sales for 31 or more days during a calendar year, then it must register as a retail merchant and collect sales tax. Find more details at www.in.gov/dor/3968.htm.
Nonprofits making purchases
If the organization is a qualified and registered nonprofit, it will be exempt from paying sales tax on some purchases. Here are some of the requirements for exempt purchases:
• The item purchased must be used for the same purpose for which the organization is exempt.
• The transaction must be invoiced directly to the nonprofit organization and paid directly via the organization’s funds.
• Purchases for the private benefit of any organization member, such as meals and lodgings, are not eligible for exemption.
For each of these exempt purchases, an organization representative will need to complete Form ST-105 and provide it to the vendor from whom the item(s) are purchased. The form tells the vendor it is ok not to charge the purchaser sales tax. The vendor must use the form to verify that purchaser is a representative of a qualified, sales tax exempt nonprofit. The vendor must keep a copy to show the Department of Revenue if audited.
Here are a few notes about completing Form ST-105:
• It should be signed by a responsible business representative – a board trustee, a secretary/treasurer or in some cases a pastor/minister.
• It should be updated periodically as circumstances, staff, or other details change.
• It can be issued to a vendor on a “blanket” basis (there is a checkbox on the form) for vendors from whom the organization purchases regularly. In these cases, the organization would not need to provide the form repeatedly.
• It is a vendor’s responsibility to grant sales tax exemptions only to those who present qualified completed exemption certificates, so be sure the Form ST-105 is accurately completed when presented to the vendor.
For questions about an organization’s sales tax exemption, call the IDR sales tax hotline at (317) 233-4015.
To read more details about nonprofit’s purchases or how to handle unique sales tax exemption situations, check out the Sales Tax Information Bulletin #10.
To learn more about registering as a nonprofit, visit http://www.in.gov/dor/3968.htm.
To read a complete guide on taxes nonprofits may be required to collect and remit, read ITWncome Tax Information Bulletin #17.
November 15th 2017
incorporated in Lithuania called UAB Nude Estates 2. In 2012, Nude Estates Malta Ltd. transferred the ownership of both Nude Estates 2 and the mall to a new offshore company, Nude Estates 1, based on the English island of Guernsey. Both Malta and Guernsey are low-tax jurisdictions, though foreign investors pay a five percent tax on company profits in Malta, while they pay no tax in...
The Rock Star, The Nude Estates, and the Lithuanian Shopping Mall
incorporated in Lithuania called UAB Nude Estates 2. In 2012, Nude Estates Malta Ltd. transferred the ownership of both Nude Estates 2 and the mall to a new offshore company, Nude Estates 1, based on the English island of Guernsey. Both Malta and Guernsey are low-tax jurisdictions, though foreign investors pay a five percent tax on company profits in Malta, while they pay no tax in Guernsey."
There you have it. Even paying 5% tax in Malta, they still hadn't found what they were looking for. So Nude Estates tripped through the waters with Bono's money for the rattle and hum of tax-free Guernsey. Bono himself seemed taken aback by the disclosure. He said he would be distressed if "anything less than exemplary" was done with his name anywhere near it. And he said, "I take this stuff very seriously. I have campaigned for the beneficial ownership of offshore companies to be made transparent. Indeed this is why my name is on documents rather than in a trust."
Here in the U.S, we're subject to tax on all our worldwide income, no matter where it's earned. That means that moving investments offshore doesn't convey any sort of automatic tax benefit, with or without you. Fortunately, the same internal revenue code that taxes us on foreign income offers countless strategies to minimize or avoid that tax. All you really need is a plan. So call us when you desire to save, and let's see if we can rescue enough wasted tax dollars to send you someplace where the streets have no name!
November 8th 2017
The streaming video service Netflix has earned a reputation for providing quality content like Narcos, Orange is the New Black, and The Queen. But Netflix has also upended how millions of people consume television. How have they done that? By dropping an entire season's worth of a series all at once, letting you "Netflix and chill" with a single episode or binge for an entire weekend. (What...
The streaming video service Netflix has earned a reputation for providing quality content like Narcos, Orange is the New Black, and The Queen. But Netflix has also upended how millions of people consume television. How have they done that? By dropping an entire season's worth of a series all at once, letting you "Netflix and chill" with a single episode or binge for an entire weekend. (What kind of savage network would make viewers wait an entire week between episodes of their favorite show? HBO, that's who.)
Netflix's latest hit, which dropped its second season last month, is Stranger Things, a love letter to the classic horror, sci-fi, and fantasy films of the 1980s. The show features a pack of bike-riding preteen friends from sleepy Hawkins, Indiana, who team up with the local sheriff and a mysterious paranormal girl named Eleven. Together, the motley crew fights to save the world from a parallel universe that connects through the super-secret "Hawkins National Laboratory."
Most Stranger Things viewers love the show's music and movie references. Naturally, it makes us nostalgic for 1980s taxes. (Have we told you we need to get out more often?) So, for all you "Upside Down" fans, let's take a walk down memory lane and see what taxes looked like when it was "morning in America":
The '80s opened with 15 tax brackets topping out at 70% for joint filers reporting $215,400+ in taxable income (roughly $683,000 in today's dollars). In 1981, Washington dropped the top rate down to 50%, and the Tax Reform Act of 1986 condensed the whole shebang into just two brackets topping out at 28%.
Tax shelters were big business! If you didn't feel like giving Uncle Sam 70% of your last dollar of income, you could buy limited partnership interests in all sorts of activities, including oil and gas programs, real estate syndications, cattle feeding schemes, aircraft and equipment leasing deals, and "master recording disks," whatever those were. Nobody "invested" in these boondoggles because they made business sense; they were all about the tax losses.
You could report your dependent children on the honor system, without supplying Social Security numbers. This led to millions of people fraudulently claiming deductions for nonexistent children and even household pets. (Don't just love them like family . . . deduct them like family!)
You could disappear from the office like Don Draper for a three-martini lunch and write off 100% of the cost, versus 50% today. (As former President Gerald Ford put it in a 1978 speech, "Where else can you get an earful, a bellyful, and a snootful at the same time?")
You could deduct interest you paid to buy almost anything except tax-free bonds. Want one of those little Japanese cars that were just hitting the market? How about your first "personal computer"? What about a microwave oven or VCR? You could deduct interest you paid to buy all of them.
Here's something to think about as you sit down for season two of Stranger Things. The shadow monster, demogorgons, and The Upside Down are all just make-believe — but the risk of overpaying your taxes is very real. So don't fight your way out of a creepy government lab — or scary IRS tax code — all by yourself! Call us for a plan and we'll guide you to safety!
November 1st 2017
Former President Jimmy Carter once called our tax code "a disgrace to the human race," and there's really not a lot to like about it. There's at least some consolation, though, in the fact that we're all stuck with the same maddening rules. If you and your spouse file jointly, and your ordinary taxable income is $100,000, you'll pay the same amount as any other joint filers reporting the same...
Talk About "Prime" Real Estate!
Former President Jimmy Carter once called our tax code "a disgrace to the human race," and there's really not a lot to like about it. There's at least some consolation, though, in the fact that we're all stuck with the same maddening rules. If you and your spouse file jointly, and your ordinary taxable income is $100,000, you'll pay the same amount as any other joint filers reporting the same $100,000 in ordinary taxable income.
That's not always the case with state and local taxes, though. If you're big enough, and you're willing to flex a little muscle, you can find someplace willing to court you like royalty. Most cities are more than happy to trade away a bit of property tax on a corporate headquarters in exchange for the payroll taxes, income taxes, and sales taxes they can levy on the people who work there, along with the economic development that comes with new jobs. Other places are willing to offer flat-out bribes in the form of tax credits.
And that brings us to this week's story . . . Amazon.com started life in 1994 as an online bookseller. Since then, though, it's grown to become the largest online retailer in the world. For four glorious hours this July 29, founder Jeff Bezos was the richest man on the planet. (The company reported disappointing earnings at the end of that day's trading, and Bezos's stock tanked $6 billion overnight. Must have been nice while it lasted!) If you're reading these words, you've bought something from Amazon, and you're probably one of its 80+ million Prime members.
In September, Amazon announced plans to drop $5 billion on a second headquarters equal to their current home in Seattle, code-named HQ2. They want to locate the new facility in a metropolitan area of at least a million people, within 45 minutes of an international airport, with a highly educated workforce.
The lucky winner will get up to 8 million square feet of new space and up to 50,000 new jobs paying an average of $100,000 per year. But the benefit of the new headquarters will ripple throughout the winning town's economy. Those 50,000 employees will all need places to live — pushing property values up an estimated 2%. They'll need places to eat, drink, and shop. Amazon reports that every dollar they currently invest in their current headquarters generates $1.40 for Seattle's economy overall.
Naturally, every city in America wants in. By October 18, 238 municipalities had submitted their bribes bids, from 54 states, provinces, districts, and territories across North America. Seriously, winning HQ2 is the closest thing any city will ever come to winning the Powerball.
New Jersey has offered $7 billion in tax rebates if Amazon picks Newark. Pennsylvania has offered up to $1 billion in breaks, with Philadelphia throwing in $2 billion more over the next 10 years. (That's a lot of cheese steaks!) Several cities went even further to stand out from the crowd. Tucson, AZ sent a 21-foot-tall cactus. The Mayor of Charlotte, NC declared October 18 to be "#CLTisPrimeDay." And the town of Stonecrest Georgia offered to rename itself Amazon.
We realize you don't have enough muscle to negotiate your own tax rate. The good news is, you may not have to. Remember that tax code that Jimmy Carter called a disgrace to the human race? It's got 70,000 pages full of deductions, credits, loopholes, and strategies that you can use to pay less. So call us for a plan, and see how much we can deliver!
October 25th 2017
In today's new Gilded Age, Americans are constantly vying to one-up each other. You show up at your high-school reunion in a new Mercedes E-Class; then your classmate pulls up in a Maserati Quattroporte. (Some would call it a $50,000 car with a $50,000 hood ornament, but still, it's a Maserati.) You show off a picture of your 42-foot sloop; your neighbor whips out his phone to show off his...
For the Love of Art
In today's new Gilded Age, Americans are constantly vying to one-up each other. You show up at your high-school reunion in a new Mercedes E-Class; then your classmate pulls up in a Maserati Quattroporte. (Some would call it a $50,000 car with a $50,000 hood ornament, but still, it's a Maserati.) You show off a picture of your 42-foot sloop; your neighbor whips out his phone to show off his 62-foot schooner. You show up in Davos in your new GII; your business rival flies in on a GIV. When will it all end?
The IRS isn't generally interested in financing your conspicuous consumption. (Not unless you drive that Maserati to work, in which case, trust us, you'll want to choose the "actual expense" method for calculating your deduction.) But there's a new toy that some of capitalism's winners are showing off, and this one comes with some beautiful tax breaks. We're talking, of course, about a private art museum.
Rich art collectors have always taken fat tax breaks for donating art. The Association of Art Museum Directors estimates that 90% of the collections held by major museums were gifted by individual donors. This is an especially good way to avoid tax on capital gains. Let's say you bought a minor Cezanne or an early de Kooning 30 years ago for $100,000. Now the painting is worth $3 million. If you give it to your local art museum, you can deduct the full $3 million fair market value!
Of course, there are rules in place to frame the deduction to make sure you don't abuse the privilege. If the value is more than $5,000, you'll need a qualified appraisal. Your deduction is limited to 50% of your adjusted gross income, although you can carry forward any excess for up to five years if you can't use it all in a single brushstroke. And the IRS maintains an Art Advisory Board to review appraisals.
But museums can't always give your donation the same care and attention you would give it. New York's Metropolitan Museum of Art includes over two million pieces. It's easy to imagine your donation winding up somewhere back in storage, like the Ark of the Covenant in the last scene of Raiders of the Lost Ark. That's where the private museum comes in. There's really not much to it. Just set up a private foundation to hold the collection and operate the facility, then stuff it full with your art. Now you've got your deduction and control over your collection.
Who sets up one of these private museums? Peter Brant Jr. is the son of a billionaire paper magnate who married supermodel Stephanie Seymour. In 2010, he opened the Brant Foundation Art Center, conveniently down the street from his Greenwich estate and next door to his polo club. In Potomac, MD, Mitchell Rales, founder of the Danaher Corporation, opened the Glenstone Museum across the duck pond from his house.
Plenty of public museums, including New York's Frick Museum, Philadelphia's Barnes Foundation, and Washington's Phillips Museum all started life as private collections. But critics have argued that, while the new breed of private museum meets the letter of the law, it may not always meet the spirit.
We realize your art collection might not include more than the dogs playing poker hiding in your basement rec room. But that doesn't mean you can't canvass the tax code for the same tax-planning strategies that major collectors use to structure their private museums. Just call us for a plan, and we'll see if we can make beautiful art with your finances.
October 18th 2017
Halloween is almost here, and if it seems like things have changed since you were a kid, you're right! Halloween has become big business, with the National Retail Federation predicting Americans will spend $9.1 billion on the festivities. That includes $3.4 billion on costumes, with top choices being superheroes, animals, princesses, witches, vampires, and zombies. And, "pets will not be left...
Tax Strategies for Trick or Treats
Halloween is almost here, and if it seems like things have changed since you were a kid, you're right! Halloween has become big business, with the National Retail Federation predicting Americans will spend $9.1 billion on the festivities. That includes $3.4 billion on costumes, with top choices being superheroes, animals, princesses, witches, vampires, and zombies. And, "pets will not be left behind, with 10 percent of consumers dressing their pet as a pumpkin." (If you've got a dachshund, of course, you have to dress it up as a hot dog. Rule of law.)
Naturally, when the trick-or-treaters at the IRS hear the word "billions," they reach out for a "fun sized" treat, too. (Why do they call those dinky little candy bars "fun sized," anyway? What's fun about a bite-sized Snickers or Milky Way when you can score a full-size bar in the rich kids' neighborhoods?) Let's take a quick look at how the IRS taxes our favorite Halloween dopplegangers:
- Superheroes who emigrate from other planets, like Superman (planet Krypton) and Thor (planet Asgard) are subject to U.S. tax on their domestic-source income. ("Resident alien" status doesn't distinguish between aliens from other countries and aliens from other planets.) Superheroes who meet the "green card" test or "substantial presence" test are taxed just like citizens on Form 1040. Those who don't meet either test file Form 1040NR.
- Animals don't pay taxes. (Neither do princesses.) Come on, that's just silly.
- Witches generally operate as sole proprietors, which means reporting income and expenses on Schedule C. If they sell potions along with casting spells, they'll include their eye of newt and toe of frog in "Cost of Goods Sold" in Part I, Line 4. IRS auditors understand that witches' travel expenses can be high because they live so deep in the forest. The good news is, witches can claim the same 53.5 cents/per mile allowance for travel by broom as the rest of us can claim for a full-size truck or SUV.
- Vampires generally live for hundreds of years, which lets them really harness the power of tax-deferred compounding. At the same time, careful planning is required to manage drawdown strategies once required minimum distributions become a factor after age 70½.
- Zombies pose especially frightening tax problems because they're not dead — they're undead. If Dad can't outrun a brain-eating horde and gets zombified, is he "deceased" for estate-tax purposes? If your spouse is zombified, can you still file jointly?
While we're on the topic of costumes, why don't kids ever dress up as IRS auditors? That would be scarier than anything else they can come up with. As for the grownups, can you imagine "sexy IRS auditor" costumes sitting on the shelf next to "sexy nurse," "sexy firefighter," and "sexy cop" outfits?
You probably never realized tax professionals could be so busy at Halloween! Fortunately, you don't have to work quite so hard yourself. Call us for a plan, and we'll teach you the tricks to keep as much of your treats as the law allows!
October 11th 2017
Consumer surveys consistently show that CPAs are the most trusted financial advisors of all. But what happens in the rare instance when you can't trust your CPA? Nothing good, that's for sure! Back in 2001, John Baldwin helped engineer a deal to sell Louisiana's Delta Downs racetrack for a $74 million profit. Baldwin took a $10 million fee for his work, along with some hefty interest...
The Long and Short of It
Consumer surveys consistently show that CPAs are the most trusted financial advisors of all. But what happens in the rare instance when you can't trust your CPA? Nothing good, that's for sure!
Back in 2001, John Baldwin helped engineer a deal to sell Louisiana's Delta Downs racetrack for a $74 million profit. Baldwin took a $10 million fee for his work, along with some hefty interest payments on a $17 million loan his company had extended to finance it.
But Baldwin didn't want to share those hard-earned gains with the IRS. So he went to the "Big Four" global accounting firm of KPMG for ways to pay less tax. KPMG dug into their bag of tricks and pulled out a doozy — a "one-time fix" called SOS, or Short Options Strategy. Without getting too technical, here's how this little sleight-of-hand worked. (If you're thinking "sleight-of-hand" is an unfortunate term to use in the tax-planning context, you're right.)
· First, Baldwin put up $1.5 million to buy $22 million worth of "long" options on Mexican and Brazilian currency, betting the value of the currency would go up.
· Simultaneously, he sold $22 million worth of "short" options on the same currencies, betting the price would go down.
· Next, he transferred the offsetting positions into a partnership and, relying on an old Tax Court opinion, calculated his "basis" in the partnership solely on the "long" position.
· Finally, the partnership sold all the options for roughly what Baldwin paid for them and reported a tax loss in the vicinity of that long position — even though Baldwin was never at risk for losing anywhere near that much money.
If the whole thing smells like something that comes out of the south end of a north-facing horse, that's because it was. KPMG knew it was. The IRS caught on, of course. They audited everyone in sight, and socked Baldwin with over $10 million in tax, interest, and penalties. Prosecutors indicted KPMG and 19 individuals for helping Baldwin and 600 more clients evade $2.5 billion in taxes — and the firm paid $465 million in to make it all go away. Years later, some of those 600 customers are still battling KPMG in court.
And that brings us back to Baldwin, who sued KPMG for all sorts of nefarious-sounding offenses, like fraud, negligent representation, breach of fiduciary duty, and racketeering. Last month, the Third Circuit ruled that he really just should have known better: "the fact that a prearranged, 'turnkey' transaction could generate just the right amount of losses — for an 'investment' and fee orders of magnitude smaller — should have also seemed a serendipitous coincidence indeed." To add insult to injury, even KPMG says that Baldwin never should have trusted them in the first place!
Here's the good news. The tax code offers 70,000 pages of green lights to pay less tax legitimately. So don't be afraid to ask us to show our work, and cite those green lights — book, chapter, and verse. And call us before your big scores, so we can help you make the most of them!
October 4th 2017
We live in an unfortunate era of disunity. Cultural divides, racial divides, religious divides, and political divides are threatening to tear America apart. Every so often, though, someone comes along to unite us all in a great primal scream of rage. Remember "Pharma bro" Martin Shkreli, who bought the company that manufactures the prescription Daraprim, then jacked the price from $13.50 to...
They Hate Him at the IRS, Too
We live in an unfortunate era of disunity. Cultural divides, racial divides, religious divides, and political divides are threatening to tear America apart. Every so often, though, someone comes along to unite us all in a great primal scream of rage. Remember "Pharma bro" Martin Shkreli, who bought the company that manufactures the prescription Daraprim, then jacked the price from $13.50 to $750 per pill? We really do need more people like him to unite us against a common enemy.
Rick Smith probably never imagined his company would become one of those uniters. But up until last month, he was CEO of Equifax, the credit-reporting bureau that got hacked and waited six weeks to reveal it. By that time, intruders had made off with critically sensitive information on 143 million Americans. Was the hacker just some pimply Russian teenager living in his babushka's basement? An international gang of cyber-thieves? We may never know. But that 143 million figure certainly includes thousands of our friends at the IRS, who may not look kindly on the millions of dollars Smith earned leading up to the leak.
Smith's abrupt resignation means he'll walk away with only a pro-rated portion of his $1.45 million salary for 2017. He'll also lose his performance bonus, which could have been another $3 million. Of course, he would have paid the IRS 43.4% of those amounts anyway. But Smith can afford to shrug off losing the cash comp. That's because, like with most top executives at publicly-traded companies, the real action is in the stock. In fact, Smith has taken home 633,427 shares of Equifax stock, worth roughly $60 million, just since the start of 2016. Here's how it works:
203,427 of those shares came at no cost in the form of restricted stock awards or outright grants. Smith pays ordinary income tax on the fair market value at the time it's awarded.
He acquired the rest by exercising options at cost to him of about $15.4 million. He pays regular tax on the difference between that amount and fair market value at the time he exercises the options.
Because Smith "retired," rather than getting canned, he keeps his unvested options to buy millions more worth of shares over the next few years, just as if he were still working for the company.
No matter how Smith acquires his stock, he recognizes capital gain or loss when he sells. And he's not shy about selling — since 2016, he's unloaded 679,286 shares for a net gain of $68.9 million. That's nice timing, considering the stock has dropped by more than a third since the hack was revealed. It's cost Smith $13 million of his own fortune (sorry not sorry), and the rest of the company's shareholders, billions more.
Usually when CEOs leave unexpectedly, they put out a lame excuse like "leaving to spend more time with family." In Smith's case, that might actually be true — his family is going to need a lot of help recovering their stolen identities following the breach! But hey, let's be fair here — it's not like everyone in America hates him. The class-action lawyers must be drooling at the thought of suing his company into the ground.
Smith's story illustrates one of the most important lessons in tax planning. How you make your money is just as important as how much you make. So let us help you with a plan for making the most of your income — and hopefully you aren't hacking into anyone else's server to make it!
September 27th 2017
Most of us like to eat, even if we choose to deny ourselves this pleasure from time to time. And those of us with an entrepreneurial bent often dream of opening a restaurant. Sometimes it's a bustling cafe fronting a busy urban sidewalk. Sometimes it's comfort food served on a rural byway. And when the dream works, it really is a dream. Just ask celebrity restaurateurs like Vanity Fair editor...
Too Tasty for the IRS
Most of us like to eat, even if we choose to deny ourselves this pleasure from time to time. And those of us with an entrepreneurial bent often dream of opening a restaurant. Sometimes it's a bustling cafe fronting a busy urban sidewalk. Sometimes it's comfort food served on a rural byway. And when the dream works, it really is a dream. Just ask celebrity restaurateurs like Vanity Fair editor Graydon Carter, proprietor of Greenwich Village's Waverly Inn, or Hollywood legend Clint Eastwood, whose Mission Ranch eatery draws diners and fans to Carmel, California.
Unfortunately, opening a restaurant is one of those adventures that all too often ends in disaster. Sure, FEMA may monitor Waffle House closings as a measure of hurricane intensity. But restaurants are notoriously difficult businesses to run. CNBC reports that about 60% of new restaurants fail in the first year, and nearly 80% close before their fifth year, mostly due to being in the wrong location. So if you're hoping to launch the next food empire, or just cash in on the next food craze (cupcake ATMs, anyone?) it behooves you to spend as carefully as you can — including serving the IRS as little in tax as possible.
Jon Field, his twin brother Joel Field, Eric Schilder, and Paul Butler ran a group of restaurants called Cadillac Ranch, an American-themed eatery paying homage to the classic Route 66 which once wound its way through 2,448 miles of countryside "from Chicago to LA." The group naturally deducted the usual expenses you would expect from a restaurant business, like food, labor, and rent on their store locations. But that didn't seem to be quite enough for their taste, so they started looking for more.
Internal Revenue Code Section 162 states, "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." That's a pretty broad standard, right? You know what they say, one man's "tax avoidance scheme" is another man's "ordinary and necessary." (Who decides in the end? Lawyers, of course.)
So, our plucky restaurateurs decided to stretch the definition of "ordinary and necessary" to include things like personal cars, car insurance, country club dues, and personal credit card charges. One of them used company money to pay his lawn service, home maintenance and repairs, TV and audio systems, and even new granite countertops! (Maybe he thought he could test new recipes in his home kitchen?) They even got their CPA to buy in to the scheme — over a five-year period, he helped his clients burgle $191,000 from the U.S. Treasury.
Sadly, even the tastiest restaurant fads must someday come to an end. When was the last time you saw an actual cupcake ATM? (Mexican food was never just a fad — we're pretty sure the right to tacos is enshrined somewhere in the Constitution.) Although the IRS Criminal Investigation unit opens only about 4,000 cases per year, the Cadillac Ranch made that cut. The Field brothers and the CPA all wound up sentenced to spend time as guests of the federal government, in facilities where the staff proudly dish out mystery meat three meals a day and frown when you ask to substitute a side salad for those high-carb french fries.
Fortunately, there's a better way, at least for you. The tax code offers all sorts of creative recipes for arranging your affairs to pay the least tax possible. That's where we come in. Let's see if we can sit down and cook up a plan for you. And don't forget to leave room for dessert!
September 20th 2017
"You better cut the pizza in four pieces because I'm not hungry enough to eat six." Yogi Berra The calendar is full of little-known commemorations that probably escape your attention, and this month is no exception. Some of them are just silly, like September 19's International Talk Like a Pirate Day. (Although, really, if you don't think pirates are cool, what's wrong with...
Sink Your Teeth Into This One
"You better cut the pizza in four pieces because I'm not hungry enough to eat six."
The calendar is full of little-known commemorations that probably escape your attention, and this month is no exception. Some of them are just silly, like September 19's International Talk Like a Pirate Day. (Although, really, if you don't think pirates are cool, what's wrong with you?) Some are obscure, like September 23's Restless Leg Awareness Day. But some of those special days resonate with everyone. And that brings us to September 20: Pepperoni Pizza Day. Yes, it's really a thing, and yes, it's magnifico!
Just about everyone loves pepperoni pizza. Even vegans can enjoy it with dairy-free cheese and meatless pepperoni substitutes. (Don't mock it until you've tried it!) Americans eat over 100 acres of pizza per day, and 36% of those pies have pepperoni on top. We eat over 250 million pounds of pepperoni on our pizza every year. Naturally, tax collectors love it . . . so let's see how they take their slice or two of the pie.
Pizza is a $44 billion industry here in the U.S. The top 50 chains, led by Pizza Hut, Domino's, Little Caesars, and Papa John's, account for $24.75 billion in sales. Smaller chains and independents gross $19.75 billion more. That means billions in sales taxes going to state and local governments, billions in corporate income taxes from the companies that sell those pizzas, and billions in personal income taxes from the actual people who own those businesses.
There are 76,723 pizzerias in America. Every one of those parlors pays property tax on the location. It would be poetic if New York-style pizzerias everywhere paid tribute to New York and deep-dish pizzerias nationwide kicked up to Chicago, but cross-state tax compacts aren't quite so flexible.
Fortunately, taxes on pizza aren't all "takeout." Every one of those gooey delicious pies starts with raw ingredients like wheat flour, tomato sauce, cheese, and meat. Our tax code offers some savory tax breaks to the farmers who supply those ingredients. Pork producers, for example, get depreciation deductions for farm equipment and confinement facilities to turn three-pound piglets into 275-pound hogs in just six months. That's a lot of pepperoni!
Does all this pizza talk have you thinking about opening your own place? Watch out for audits! Pizzerias are largely cash businesses, which makes it easy to skim off profits. In the early 1990s, the IRS conducted an in-depth study of mom-and-pop pizzerias in the Providence, RI area and wrote an entire guide for auditors examining them. If you're under audit, and the examiner suspects you're underreporting your sales, he might contact your meat supplier to see how much pepperoni you bought, then compare it to the pizza sales you report. If the numbers don't add up, you'll have some 'splainin to do!
Finally, don't be fooled by places serving "flatbreads." It's pizza. They just call it flatbread to charge more.
We realize there's no easy way to transition from pepperoni pizza to tax planning. But there is a connection. The less you pay in tax, the more dough you'll have to enjoy America's favorite comfort food! So come to us before you get hungry, and let's see how much more of your income "pie" you can actually eat!
September 13th 2017
Ordinarily we use this space for lighthearted stories that poke fun at the tax system and some of the clever ways that people endeavor to make it work for them, successfully or not. But the recent stories coming out of Harvey-ravaged Texas and Irma-ravaged Florida suggest a more serious tone for a change. Today we're going to walk through some tax-related opportunities when it comes to...
Help With Help
Ordinarily we use this space for lighthearted stories that poke fun at the tax system and some of the clever ways that people endeavor to make it work for them, successfully or not. But the recent stories coming out of Harvey-ravaged Texas and Irma-ravaged Florida suggest a more serious tone for a change. Today we're going to walk through some tax-related opportunities when it comes to reaching out to storm victims. You might be surprised to see how our friends at the IRS are jumping in to help, too:
- If you want to deduct your contributions, make sure you're giving to a properly registered 501(c)(3) nonprofit. There are more than 1.5 million of them, and many are making extra efforts to help storm victims. These include local groups in affected areas, faith-based groups, and even animal-welfare groups dedicated to rescuing pets displaced by the storms. Many national groups have established special funds for Hurricanes Harvey and Irma, which let you earmark your contributions.
- Be careful before you join crowdfunding efforts on sites like GoFundMe. While you can certainly find links to registered 501(c)(3) organizations, most individual campaigns won't qualify for tax deductions.
- Don't be afraid to do some homework on a charity before you give. Check out rating sites like Charity Navigator and Charity Watch, which can tell you how much of your donation your chosen group gobbles up in administrative expenses, and whether they submit their financials to an independent accountant for audit.
- There's no deduction for the value of time you volunteer for cleanup efforts and other relief. However, you can deduct any expenses you pay, such as for travel to an affected area. You can deduct 14 cents/mile driven in service of a charitable organization.
If you don't itemize deductions, consider asking your employer to donate the cash value of your unused vacation time, personal days, or sick leave to charitable organizations. Your tax break will take the form of not recognizing that income in the first place. (Your employer gets the same deduction they would have taken if they had paid it out in compensation.) IRS Notice 2017-48 sets out the rules for you and your employer.
- The IRS has a web page discussing help for victims of Hurricane Harvey, and we can assume it won't be long before they update it for Irma (and possibly Jose, which at this writing could still hit somewhere on the east coast.) You'll find extended due dates for business returns, penalty waivers, and special provisions letting retirement plans expedite loans and hardship distributions to hurricane victims and their families.
We realize that saving a few bucks on taxes may be the last thing on your mind when you see the devastation Mother Nature has wrought. But those tax breaks serve a purpose, to encourage giving and to help you give more. So don't overlook these opportunities to save. And call us with your questions — coming together as communities is how Americans support each other in times of need, like now.
September 6th 2017
The 2017 college football season kicked off this week, and for most people that means talk of pre-season polls, Heisman trophy hopefuls, and BCS championship prospects. But we're not "most people," are we? So today we're going to ignore all that boring on-field action and see how one coach's financial advisors lined up the X's and O's to outwit the defensive line at the IRS. Here's a...
$50 Million, Hut!
The 2017 college football season kicked off this week, and for most people that means talk of pre-season polls, Heisman trophy hopefuls, and BCS championship prospects. But we're not "most people," are we? So today we're going to ignore all that boring on-field action and see how one coach's financial advisors lined up the X's and O's to outwit the defensive line at the IRS.
Here's a little-known fact that might offend your sense of priorities. Seven-figure salaries are almost unheard of in academia. But the average major university's football coach makes $1.81 million per year. In fact, in 39 states, the highest-paid academic or public employee is a college football or basketball coach. (And how many of them do you think have performance bonuses tied to graduation rates?)
Alabama's Nick Saban would seem to top that list with over $7 million per year. And why not? He's rolled his Crimson Tide to four national championships in 10 years. But here's the problem, at least as far as his salary and performance bonuses are concerned. The linebackers at the IRS are out for their share, too. And they're not satisfied with a pick-six — they're looking to intercept over 40%.
It turns out that Saban's cross-country coaching rival, Michigan's Jim Harbaugh, found a clever pattern to weave around those defenders and come out on top where it really counts — after taxes. Here's how it works:
The university established a nonqualified deferred compensation plan with Harbaugh that took the form of "split-dollar" life insurance. (Split-dollar is simply a life insurance policy where the costs and benefits are shared by more than one party — typically, it's an employer and employee.)
The university agreed to make seven annual nontaxable loan advances of $2 million each for Harbaugh to use to buy a cash-value life insurance policy. Those premiums will grow to build a tax-free pool of assets while Harbaugh continues to coach the Wolverines.
Harbaugh can take nontaxable loans from the life insurance policy for supplemental retirement income so long as the remaining cash value in the policy is enough to repay the loan advances.
When Harbaugh dies, the university gets $14 million to cover the loan advances and Harbaugh's beneficiaries get the remaining death benefit. Harbaugh is a healthy 53 years old, which should leave a long time for that cash value to grow. Some experts estimate Harbaugh can run up that score to as much as $50 million.
Harbaugh won't pay any interest on the $14 million in loan advances. However, he will have to pay tax on the value of the foregone interest he would have paid, as calculated by IRS tables. But since that tax shouldn't top much more than $100,000 per year at current rates, that's an easy call to make!
Football teams have all sorts of ways to put points on the board: running plays, passing plays, options, sneaks, and even the time-tested fumblerooskie. The best coaches put together game plans to harness all those opportunities. It works the same way with taxes. So call us before you get to the red zone, and let us come up with your best game plan!
August 30th 2017
Where is "home"? Home is where the heart is. Home is wherever you make it. Home is wherever I'm with you. And, of course, I'll be home for Christmas. But what does the tax man think of all of this?In 2009, Greg Blatt was Executive Vice-President, General Counsel & Secretary of InterActive Corp (IAC), which ran 150+ web sites including About.com, Vimeo, and The Daily Beast. Blatt's...
A Match Made in Dallas
Where is "home"? Home is where the heart is. Home is wherever you make it. Home is wherever I'm with you. And, of course, I'll be home for Christmas. But what does the tax man think of all of this?
In 2009, Greg Blatt was Executive Vice-President, General Counsel & Secretary of InterActive Corp (IAC), which ran 150+ web sites including About.com, Vimeo, and The Daily Beast. Blatt's title sounded impressive, but IAC had reorganized him out of much of his responsibility, and he started looking for a new position. IAC didn't want to lose him, so they made him CEO of Match, a collection of dating sites including Match.com, OKCupid, Tinder, and PlentyofFish.
There was just one problem with the new gig — it was headquartered in Dallas. That held no appeal for the New York-based Blatt. So he worked out a deal to manage Match from New York. (Just another long-distance relationship, really.) He would keep his corporate position with IAC, spend most of his working time in New York, and keep his West Village loft and his boat in the Hamptons.
They say no battle plan survives initial contact with the enemy, and Blatt's was no exception. He got to Dallas and discovered, much to his surprise, that he loved it. The people were friendly! The city was cosmopolitan! (We realize that may be hard for the bi-coastal elites to accept, but there really is life in flyover country.)
Blatt loved the work, where he got to be "the decider." He loved his apartment in a swanky Uptown hi-rise, where 1-bedroom units start at $2,230 per month. He started dating, which makes sense for a guy running an online dating empire. (We're pretty sure Warren Buffett gets his insurance from GEICO, too.) He even moved his dog, who he had rescued from the SPCA, telling a friend, "Dog is the final step that I haven't been able to come to grips with until now. So Big D is my new home."
Unfortunately for Blatt, his Lone Star adventure was short-lived. He did so well at Match that he got promoted to CEO of IAC. While he tried to run the corporate parent from Dallas, he quickly realized he couldn't do it, and he moseyed on back to the Big Apple in 2011.
Everyone was happy except the romantics at the New York Division of Taxation, who didn't love the idea of losing taxes on Blatt's salary. In 2011, they audited him and hit him with $430,065 in taxes plus interest and penalties. Blatt paid the tax, then filed a petition for a refund. (Did we mention that New York's top tax rate of 8.82% is 8.82% higher than Texas's top rate of zero?)
Administrative Law Judge Diane Gardiner issued a 23-page opinion walking through Blatt's story. She noted mundane factors like changing his driver's license and voter registration. But the real clincher? "As borne out by the evidence in this case, petitioner's dog was his near and dear item which reflected his ultimate change in domicile to Dallas . . . . As demonstrated by a contemporaneous email regarding his move, petitioner stated that his change in domicile to Dallas was complete once his dog was moved there."
So, boys and girls, what have we learned today? Well, we've learned that home is where the dog is. More important, we've learned that home is where the tax savings are — in this case, $430,000 worth. So call us when you're ready to save, and let's see if we can help feather your nest!
August 23rd 2017
One of the highlights of living in our technologically-advanced age is the ability to buy tools to do almost anything. If your kid fractures his arm playing baseball, you can hop on over to Amazon and order an orthopedic bone saw for less than the cost of a tank of gas. Then you can (probably) head over to YouTube and watch a video explaining how to smooth off the rough edges and set it for...
TurboTax Made Me Do It
One of the highlights of living in our technologically-advanced age is the ability to buy tools to do almost anything. If your kid fractures his arm playing baseball, you can hop on over to Amazon and order an orthopedic bone saw for less than the cost of a tank of gas. Then you can (probably) head over to YouTube and watch a video explaining how to smooth off the rough edges and set it for best results. You might not want to do that all yourself. But the tools are there if you want them.
Here in the tax business, there's no shortage of similar tools you can use to help satisfy your obligations with your friends at the IRS. TurboTax, TaxCut, and similar programs give you much the same power as professional tax-prep systems. If your circumstances are simple enough, and you're familiar with the process, you might be able to do a perfectly serviceable job of preparing your own return. You might not want to write off an entire weekend wrestling with the various questions, forms, and procedures — but the tool is there if you want to.
But sometimes, doing it yourself really isn't the best idea. Barry Bulakites just learned that the hard way, to the tune of a trip to Tax Court (where he represented himself, of course). Bulakites is a San Diego-based insurance consultant who works with accountants, but who didn't see the value in hiring a professional to prepare a pretty complicated return. Here's how his DIY tax prep worked out:
He deducted $79,000 in mortgage interest in 2011 and 2012, for a loan that was due to be paid off in 2008. The court could see that Bulatikes had paid something, but he couldn't cough up the paperwork to show the amount of interest or even why he was obligated to pay. The court disallowed it all.
He deducted $100,000 in alimony he paid over the same period. His separation agreement specified $2,000 per month, but he and his ex- orally agreed to bump it to $5,000. Unfortunately, the law specifies oral agreements aren't enough to qualify, so the court disallowed the excess.
He deducted $185,673 for "other expenses" in 2011, which he claimed was a net operating loss carryforward from a previous year that he put on the wrong line of his return. Too bad he failed to file the required "concise statement setting forth the amount of the net operating loss deduction claimed and all material and pertinent facts relative thereto, including a detailed schedule showing the computation of the net operating loss deduction." The court allowed just $142.
Bulakites admitted that he deducted things he shouldn't have and overstated things that he could. But then he threw TurboTax under the bus for "luring him into" claiming them! We can just imagine what that would have looked like. Did it dare him to stretch that alimony deduction by an extra $3,000 per month? Did it challenge him: "are you man enough to deduct this net operating loss?" In the end, the court concluded that "[t]ax preparation software is only as good as the information one inputs into it."
Here's the real irony, at least as far as we're concerned. Preparing your taxes, on your own or with a professional, is important. But all that really does is record history. The real value comes from planning your taxes to pay less in the first place. So call us when you're ready for planning, and don't let cheap office-supply store software bully you into paying more than you have to!
August 16th 2017
Mark Twain once said, "Never put off till tomorrow what may be done the day after tomorrow just as well." But Twain's advice doesn't always pay when it comes to taxes. The calendar watchers at the IRS charge a 5% per month failure to file penalty, up to 25% of the amount due, along with a ½% per month failure to pay penalty, also up to 25% of the total amount due. And the IRS isn't...
Mark Twain once said, "Never put off till tomorrow what may be done the day after tomorrow just as well." But Twain's advice doesn't always pay when it comes to taxes. The calendar watchers at the IRS charge a 5% per month failure to file penalty, up to 25% of the amount due, along with a ½% per month failure to pay penalty, also up to 25% of the total amount due. And the IRS isn't the only tax man to pay attention to deadlines, even if they don't loom as large in our minds as April 15.
Presidio Terrace is a private block-long oval of a street in San Francisco's pricey Presidio Heights neighborhood, lined with 35 multimillion-dollar mansions. Residents have included Senator Dianne Feinstein, Representative Nancy Pelosi, and former San Francisco Mayor Joseph Alioto. There's a stone-gate entrance to the street, a rent-a-cop stationed at the gate to keep out snoopy mcsnoopfaces, and a manicured island inside the oval for residents to enjoy.
The street and sidewalks are owned by a homeowners association made up of surrounding residents. Because it's private, the association pays tax on the property — in this case, a whopping $14 per year. Now, $14 may not sound like it can power a lot of local government. But the city still wants their money. So, every year, the Treasurer-Tax Collector dutifully mails the bill to the association's accountant on nearby Kearny Street.
There's just one teensie-weensie, tiny little problem. That accountant hasn't worked for the HOA since the 1980s. (Oops.) That means the bill hasn't been paid since MTV still played music videos and Madonna was a doe-eyed ingenue. Suddenly, $14 per year snowballed into $994 in taxes, penalties, and interest. Most of the street's residents could have covered it with spare change from their couch cushions. But the city went ahead and put the street up for auction!
Enter Michael Cheng and his wife Tina Lam, real estate investors from nearby South Bay. Cheng spotted the listing for the auction and smelled money. He wasn't the only bidder looking to pick up this particular opportunity. But he outlasted the rest and, for $90,100 — sight unseen — the street was theirs!
So how can a couple of scrappy young real estate investors monetize their ownership of a block-long street surrounded by card-carrying 1%-ers? Start with parking. The street has 120 spots, which make it a potential gold mine in a city where a single parking space recently sold for $80,000. (And if the folks on the street don't want to pay to park in front of their own houses, maybe the Chengs could rent spots to the peasants living outside the gates?)
Needless to say, the people who actually live on Presidio Terrace aren't nearly as excited about paying to park on their own street as the investors who just bought it. The residents have hired an attorney, of course. (Funny how many of these weekly stories involve hiring an attorney.) They've petitioned the city to void the sale, and scheduled a hearing for October. And they've sued the city to stop the Chengs from flipping the street to anyone else until after they're done with that fight.
Twenty years ago, an author named Richard Carlson made a fortune selling a book called Don't Sweat the Small Stuff: and It's All Small Stuff. Unfortunately, sometimes you really do have to sweat the small stuff. Fortunately, you've got us. So let us sweat it for you, and save you a buck or two in the process!
August 9th 2017
What were you doing at the end of your day on Friday, August 4? Were you knocking back a bottle of suds at your favorite happy-hour bar? Enjoying vacation time with a cold one overlooking a beach or a harbor? Maybe feeling ripped off paying $14 for a tallboy of St Louis's finest at your local ballpark? Well, hopefully you were doing something like that, because the first Friday in August is...
What were you doing at the end of your day on Friday, August 4? Were you knocking back a bottle of suds at your favorite happy-hour bar? Enjoying vacation time with a cold one overlooking a beach or a harbor? Maybe feeling ripped off paying $14 for a tallboy of St Louis's finest at your local ballpark? Well, hopefully you were doing something like that, because the first Friday in August is International Beer Day!
Beer is the world's oldest alcoholic beverage — chemical tests of ancient pottery jars reveal that brewers produced beer as long as 7,000 years ago in ancient Iran. It's the third most popular beverage overall, behind water and tea. (Sorry, Starbucks, it's the rare coffee drinker who chugs more than one of your lattes in a day.) As Ben Franklin once famously said, "Beer is proof that God loves us and wants us to be happy." It's almost as easy to make as it is to drink, and you can do it with as few as three ingredients: water, hops, and barley.
So . . . would it surprise you to learn that taxes are actually the priciest ingredient? Taxes are more expensive than labor and raw material combined — and even more than marketing, which typically runs over 30% for a national brand.
Here in the U.S, the states take the lead on taxing beer. Taxes start as low as two cents per gallon. But they range up to a foamy $1.29 per gallon in Tennessee, including a 17% wholesale tax. Arkansas, Maryland, Minnesota, and DC include statewide sales taxes specific to alcoholic beverages. Other states impose distributor taxes, case fees, and bottle fees. Don't forget regular sales taxes on top of those special rates.
And that's before the tipplers at the IRS draft their share! The federal excise tax on beer is set at $18 per barrel for brewers who produce more than 2 million barrels (you know, the ones who brew beer in tanks the size of Rhode Island), and importers. Smaller brewers trying to get a head get tax credits reducing the effective rate to $7 per barrel on the first 60,000 barrels, which encourages the sort of craft-beer competition that gives you 57 varieties of India Pale Ale on tap at your local pub, along with beers flavored with lemon, watermelon, and even banana.
Today there are over 4,000 breweries across the country, including a whole new universe of craft breweries and brewpubs that didn't exist a decade ago. All told, the beer industry contributes $252.6 billion to the economy and supports 1.75 million jobs. The Beer Institute, a national trade association representing those 4,000 breweries, estimates that once all those taxes are added up, they make up more than 40% of the retail price of your favorite six-pack.
The beer lobby even buys a few rounds, with its own version of proactive planning to pay less tax. The result? In a rare example of bipartisan cooperation, Senator Ron Wyden (D-OR) and Representatives Erik Paulsen (R-MN) and Ron Kind (D-WI) have introduced the Craft Beverage Modernization and Tax Reform Act, which would skim the tax to just $3.50 on the first 60,000 barrels for the pint-sized producers and reduce it to $16 per barrel on the first 2 million for the big guys.
You may not have an industry lobby fighting to keep your taxes down. But you do have us. So call when you're ready for your own proactive plan. We're confident you'll want to raise a toast to the results!
August 2nd 2017
When affluent clients want to pay less tax, they turn to accountants, attorneys, and financial advisors, among other advisors. And we can make a nice living helping clients accomplish that goal. (At the risk of sounding self-serving, it's because we're worth it.) But you won't find any tax professionals populating the Forbes 400, or your hometown paper's list of richest local...
Making More By Paying Less
When affluent clients want to pay less tax, they turn to accountants, attorneys, and financial advisors, among other advisors. And we can make a nice living helping clients accomplish that goal. (At the risk of sounding self-serving, it's because we're worth it.) But you won't find any tax professionals populating the Forbes 400, or your hometown paper's list of richest local residents.
Having said that, there are a few people who have made legitimate fortunes helping people pay less tax. They just aren't working where you think they are.
Most of us don't give much thought to tariffs, simply because we don't directly pay them. When we do pay them any mind, we typically think of international trade policy and raw materials like steel. But governments impose import taxes on consumer goods, too, including luxury favorites like perfume and cologne, watches and jewelry, high-end spirits, and the like. And while those duties don't add up like income taxes, buyers don't want to pay any more of them than they have to.
Robert Miller grew up in Massachusetts and attended Cornell University's prestigious School of Hotel Administration. But he took a different direction than most of his classmates, and five years after graduating, he launched the first Duty-Free Shop in Hong Kong. In 1962, Miller secured the rights to operate the first duty-free shop in America, in the Honolulu airport. This opened his doors to servicemen returning from Asia and wealthy Japanese travelers.
Miller and his partners eventually expanded the chain to over 420 locations in airports and high-end retail locations across the globe. In 1997, his partners sold their interests to the Paris-based luxury-goods conglomerate LVMH. But Miller kept 38% of the company, and today his net worth stands at about $2.8 billion.
And how does a guy who made billions helping his customers sidestep taxes live? Pretty much exactly how you'd expect. Miller, now 84, is a champion yachtsman — he sailed his 42-meter monohull Mari-Cha IV to a world record Atlantic crossing in six days, 17 hours, and 52 minutes. He owns a 36,000-acre sporting estate in Yorkshire, along with houses in New York, Paris, and Gstaad. (It's pronounced g-schtad, for those of you don't regularly ski the Swiss alps.)
Miller's three daughters have earned their own fame as socialites, and for marrying spectacularly well. Pia, the oldest, married a grandson of oil baron J. Paul Getty. Marie-Chantal, the middle, married Crown Prince Alexander of Greece. (We know the Greeks may not be the most prestigious royals these days, but their blood is more blue than ours!) And Alexandra, the baby, married the son of Prince Egon von Furstenberg.
Miller's success in helping customers avoid import duties may not hold any direct lessons for us. But he's obviously done some sophisticated income tax planning, too. And that's where we come in. So call us when you're ready to save, and let's see if we can help you afford more luxury goods on your next international flight!
July 26th 2017
One day back in March, 2002, Us Weekly editor Bonnie Fuller spotted a photo of actress Drew Barrymore bending over to pick a coin off the ground. A light bulb flipped on over her head, and on April 1, her magazine debuted a brand-new photo feature that changed the paparazzi game forever. We're talking, of course, about "Stars — They're Just Like Us." (Of course, they're still not quite...
Celebrities Behaving Badly
One day back in March, 2002, Us Weekly editor Bonnie Fuller spotted a photo of actress Drew Barrymore bending over to pick a coin off the ground. A light bulb flipped on over her head, and on April 1, her magazine debuted a brand-new photo feature that changed the paparazzi game forever. We're talking, of course, about "Stars — They're Just Like Us." (Of course, they're still not quite just like us . . . how many photographers are fighting to catch pictures of us picking up our dry cleaning, filling up our gas tanks, or trying to pick the ripest avocado at Whole Foods?)
Here's something else the stars share with us. They don't want to waste money on taxes they don't have to pay. And since they tend to make more money than we do, they tend to owe more taxes. So that pain over unnecessary tax is greater for them than it is for us! (Who says money solves all your problems?)
But sometimes they go a little too far to pay less. And that's when they discover our friends at the IRS lying in wait. Here's the problem: the IRS doesn't have nearly enough money to make sure everyone is paying their legal share. Audit rates are down to historic lows. So when they get a chance to make examples of bold-faced names, they're sure to jump on the case — even if Us Weekly won't be combing Tax Court filings and Justice Department press releases the way we do.
Our first story this week involves boxer Floyd Mayweather, who's made as much money with his fists as any man alive. Back in 2015, he earned a reported $220-230 million for defeating Manny Pacquiao in the Fight of the Century. (Granted we're less than one-fifth into the century, but the payday itself lived up to the hype even if the fight didn't.) Unfortunately, Mayweather doesn't have anyone to withhold taxes from that paycheck.
Mayweather isn't disputing how much he owes. He says he just doesn't have the cash to cover it. ($15 million worth of cars in his garage, sure. Cash in the bank, not so much.) So he's asking the Tax Court to grant him a short-term installment agreement and waive his failure-to-pay penalties. He's argued that he has "a significant liquidity event" coming up in approximately 60 days, by which he means his next fight of the century, a potential $400 million payday against MMF superstar Conor McGregor.
This isn't Mayweather's first bout against the IRS. In 2008, they filed a $6.7 million lien against him for 2007 taxes. Mayweather won that fight on points, settling for $5 million. Last year, the Tax Court ordered him to pay $1,627,563 for 2006. Also last year, he sent a Las Vegas strip club a 1099 for $20,323 he spent on strippers on May 25, 2014. Apparently he understands that "making it rain" is a taxable event, but thinks it's the club's responsibility to cover the taxes for the dancers who actually took home the cash.
Rapper DMX (real name Earl Simmons) is also feeling some summer heat from the IRS. On July 13, he was arrested on 14 counts of tax fraud. Feds say he turned the tables by using bank accounts in other peoples' names while fronting his expenses in cash. The haters at the IRS say he didn't pay $1.7 million in taxes he owed from 2002-2005, and failed to file returns entirely from 2010-2015.
Look, we know you don't want to pay more tax than you have to. And we know you're not willing to risk an appearance in the news (or court!) to pay less. But you don't have to feel stuck between a rock and a hard place. You just need a plan. So call us when you're ready to lace up your gloves, and let us take your corner!
July 19th 2017
Summer is here, and in most of the country, it's hot! The All-Star game has come and gone, dog days are right around the corner, and if your air conditioner makes a funny noise, the hair stands up on the back of your neck. Now, we can't help you if your air conditioner breaks, but we can try and put a smile on your face with a few tax quotes to start your day. Try and spot the summer...
Summer is here, and in most of the country, it's hot! The All-Star game has come and gone, dog days are right around the corner, and if your air conditioner makes a funny noise, the hair stands up on the back of your neck. Now, we can't help you if your air conditioner breaks, but we can try and put a smile on your face with a few tax quotes to start your day. Try and spot the summer references hidden inside — they might not be quite as easy to find as you think!
"A dog who thinks he is man's best friend is a dog who has obviously never met a tax lawyer."
"The United States will get a value added tax when conservatives realize that it is regressive, and liberals realize that it is a money machine."
"Baseball is a skilled game. It's America's game — it, and high taxes."
"Taxes are paid in the sweat of every man who labors. If those taxes are excessive, they are reflected in idle factories, tax-sold farms and in hordes of hungry people, tramping the streets and seeking jobs in vain."
Franklin D. Roosevelt
"Taxation with representation ain't so hot either."
"The IRS spends God knows how much of your tax money on these toll-free information hot lines staffed by IRS employees, whose idea of a dynamite tax tip is that you should print neatly. If you ask them a real tax question, such as how you can cheat, they're useless."
"Republicans believe every day is the Fourth of July, but Democrats believe every day is April 15."
"If [a United States Supreme Court Justice is] in the doghouse with the Chief [Justice], he gets the crud. He gets the tax cases."
Not many of us are thinking about taxes after April 15. But the reality is, there's never a bad time to stop wasting money on taxes you don't have to pay. The sooner you start planning, the sooner you'll rescue those dollars from your paycheck or quarterly estimates. So call us before the heat gets too high and see if we can bring you some cool relief!
July 12th 2017
Actress Alyssa Milano first gained fame playing Tony Danza's daughter on the television sitcom Who's the Boss. The show ran for eight seasons, snagged ten Emmy and five Golden Globe nominations (winning one of each), and established Milano as a bone fide teen idol. While her star has dimmed since then, she continues to work in Hollywood and seems to be one of the few child stars in recent...
Accountants Behaving Badly
Actress Alyssa Milano first gained fame playing Tony Danza's daughter on the television sitcom Who's the Boss. The show ran for eight seasons, snagged ten Emmy and five Golden Globe nominations (winning one of each), and established Milano as a bone fide teen idol. While her star has dimmed since then, she continues to work in Hollywood and seems to be one of the few child stars in recent memory to grow into adulthood without well-publicized trips to rehab or jail.
Today, Milano is as busy as a bumblebee. So she and her husband, agent David Bugliari, employed a business manager to handle "the details." Usually those relationships proceed without trouble. But that's not the case with Milano, who just sued her manager, CPA Kenneth Hellie, for $10 million.
Milano says the relationship first soured with "a home improvement debacle." She and her husband bought their Ventura County home in 2013 with plans to spend $1.1 million remodeling it. They wound up spending $5 million on the house which is now worth $3 million. (That odd math may not sound implausible to anyone else who's done a gut rehab!)
But Milano soon discovered that Hellie had made eight late mortgage payments in a 13-month period. That destroyed her credit, which meant she couldn't refinance the house. She also says:
He failed to pay her 2013 and 2014 income taxes,
He used scotch tape to attach her signature to wire transfers to make unauthorized withdrawals, and
He failed to pay her employees or their taxes, and
His reassurances that the finances were in shape gave her the confidence to pass up a $1.3 million paycheck for starring in a third season of ABC's "Mistresses" series.
Of course, every story has two sides (especially in Hollywood). Hellie's response basically throws her husband under the bus, arguing that he approved additional remodeling expenses and may have been "intentionally or negligently keeping Milano in the dark regarding the couple's deteriorating finances." He blames the couple for their own lavish spending, including "a second home in the mountains, private planes, a country club membership, a boat, and numerous personal staff such as multiple nannies and housekeepers."
Milano is hardly the only Hollywood celebrity to break with her manager. Actor Johnny Depp, who spent $3 million to shoot author Hunter S. Thompson's ashes out of a cannon, has sued his manager for $25 million for a similar series of offenses. And singer Alanis Morissette's so-called business manager has ironically just reported to federal prison in Oregon for embezzling millions from her and other clients. (She said he would literally cry when she asked where her money had gone!)
Here's the lesson from today's sad stories. Choose wisely! Don't ask us for advice on remodeling your home or managing your household staff. But do count on us to help stop wasting money on taxes you don't have to pay. And remember, we're here for your co-stars, too!
July 5th 2017
Summer is here, so naturally, everyone's thinking about hockey. The Pittsburgh Penguins have just taken their second Stanley Cup in a row, and the rest of the NHL is working to make sure there's no three-peat. But one of those teams just won a different sort of contest, in Tax Court of all places. So let's go to the tape . . . Jeremy Jacobs is the owner and chairman of Delaware North,...
IRS Slapshot Misses
Summer is here, so naturally, everyone's thinking about hockey. The Pittsburgh Penguins have just taken their second Stanley Cup in a row, and the rest of the NHL is working to make sure there's no three-peat. But one of those teams just won a different sort of contest, in Tax Court of all places. So let's go to the tape . . .
Jeremy Jacobs is the owner and chairman of Delaware North, a concession company operating at places like stadiums, racetracks, and national parks. (Sounds like he's as much to blame as anyone for the $14 beers you bought at your last ballgame.) He also owns the Boston Bruins, which finished 2017 with a 44-31-7 record in the league's Eastern Conference. Forbes magazine pegs his net worth at just $4.4 billion, which means he's barely a billionaire and still has to watch his pennies.
The Bruins play half their games on the road. Those road trips can get expensive, especially when it comes to feeding everyone: "between 20 and 24 players, the head coach, assistant coaches, medical personnel, athletic trainers, equipment managers, communications personnel, travel logistics managers, public relations/media personnel, and other employees." The team actually requires everyone to attend breakfast, where players meet with coaches to talk strategy, review film, discuss media inquiries, and make roster changes.
The Bruins spent $255,274 on team meals in 2009 and $284,446 in 2010. Now, we all know those are deductible: you can write off 50% of the cost of meals you eat while traveling for business. But Jacobs wasn't satisfied deducting just 50%. He (or at least his accountants) wanted to deduct 100% of those expenses as de minimis fringe benefits.
Here's the problem. For employee meals to qualify as a de minimis fringe benefit, they have to be served at a facility "owned or leased by the employer." But the team served half of those meals on the road. So the IRS iced half of those expenses, and the parties wound up facing off in court.
Judge Ruwe sounds like a hockey fan. His opinion runs a full 34 pages, which is the Tax Court equivalent of overtime for a case that size. The main issue was whether the hotel meeting rooms where the team served meals qualified as their "business premises" under code section 132(e)(2). And the referee judge, exercising some much-appreciated common sense, ruled for the team.
In short, he said, league rules require the team to play half of its games away from home, and even arrive at least six hours before game time. Wherever the team hosts those meetings is its "place of business," sat least for that contest, so the meals the team serves are 100% deductible de minimis fringe benefits. The decision saved Jacobs $45,205 for 2009 and $39,823 in 2010.
NHL Hall of Famer Wayne Gretzky once said: "A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be." We agree with Gretzky, and we don't settle for playing where the puck is. So call us when you're ready to suit up against the tax code, and let's put some Ws on the board!
June 28th 2017
Businesses generally try to get the highest price possible for their products. It's called "capitalism," and it generally works to establish "equilibrium prices" between knowledgeable buyers and willing sellers. But every so often, this mechanism breaks down and prices soar, resulting in howls of "price gouging!" from ticked-off customers. This is especially true with pharmaceuticals. In...
Clean Tax Savings Here
Businesses generally try to get the highest price possible for their products. It's called "capitalism," and it generally works to establish "equilibrium prices" between knowledgeable buyers and willing sellers. But every so often, this mechanism breaks down and prices soar, resulting in howls of "price gouging!" from ticked-off customers. This is especially true with pharmaceuticals. In 2015, hedge fund manager Martin Shkrelli made himself the most-hated man in America when he bought Turing Pharmaceuticals and raised the price of the antiparasite Daraprim from $13.50 to $750 per pill.
Another example: in 2007, Mylan pharmaceuticals bought rights to distribute the EpiPen, a device that costs $5 to manufacture and delivers a dollar's worth of epinephrine to stop severe allergic reactions. Mylan quintupled sales, and even helped pass legislation encouraging schools to stock the devices. But they also jacked pricing from $100 to $609 per pair, which led to harmful side effects for the business. Customers revolted and sent the CEO on a Bataan Death March of bad press. Even Martin Shkrelli piled on the criticism — and when that guy calls you a price gouger, you're "Code Blue."
With sales going from $200 million to over $1 billion in just nine years, you'd think the IRS would get a full dose of the success, too. It turns out, though, that Mylan is just as clever about cutting its tax bill as it is marketing EpiPens. In 2014, they executed a controversial strategy called a "tax inversion," buying a smaller Dutch company in order to move their nominal headquarters to the lower-taxed Netherlands. And Reuters has just revealed another strategy involving huge stakes in, of all things, coal companies. Here's how it works:
The company buys a coal-refining facility. (Mylan owns LLCs with 99% stakes in five of them, buried deep in the footnotes of the company's annual report.)
The facility buys raw coal, often from a utility, and treats it to remove the chemicals that cause the worst pollution.
The facility sells the coal back to the utility, usually at a loss.
Finally, the parent company takes federal tax credits, which were equal to $6.81 per ton of refined product in 2016.
As long as the tax credit from Step Four is more than the after-tax loss from Step Three, the parent company come out ahead! How far ahead? Reuters reports loss from the refining operations, depreciation from the facilities, and tax-savings from credits netted Mylan over $100 million last year. In fact, the company's effective tax rate for that year was an eye-popping -294.4%, which means they made far more in compounding tax benefits than they did in operating profit!
So where does that leave us? Well, you probably aren't sufficiently well-heeled to buy a coal refining plant as a personal tax shelter. But the code is full of literally hundreds of ways to avoid paying more than your legal duty. All you need is a plan. So call us when you're ready to save, and we promise no harmful carbon emissions!
June 21st 2017
In 1984, the documentary filmmaker Marty Di Bergi scored a hit with This is Spinal Tap, a look inside Britain's loudest band and their 1982 Smell the Glove concert tour. Lead singer David St. Hubbins, lead guitarist Nigel Tufnel, and bassist Derek Smalls, were joined by a series of drummers who died under mysterious circumstances, including spontaneous combustion and a bizarre gardening...
This Is Spinal Tax
In 1984, the documentary filmmaker Marty Di Bergi scored a hit with This is Spinal Tap, a look inside Britain's loudest band and their 1982 Smell the Glove concert tour. Lead singer David St. Hubbins, lead guitarist Nigel Tufnel, and bassist Derek Smalls, were joined by a series of drummers who died under mysterious circumstances, including spontaneous combustion and a bizarre gardening accident that authorities said was "best left unsolved."
Of course, the whole thing was a spoof. "Marty Di Bergi" was really director Rob Reiner, and the band members were played by actors Michael McKean, Christopher Guest, and Harry Shearer. (Having said that, they really did play their own instruments — and yes, they really did turn the volume up to 11.)
This is Spinal Tap cost just $2.5 million to make. But it has become a cult classic, and grossed countless millions in ticket sales, home video sales and rentals, merchandising, and foreign rights. The four co-creators signed contracts giving them 40% of the movie's back-end profits, 50% of the the music receipts, and 5% of the merchandising. Yet they report getting just $179 in total income from 1984 to 2006. Now Harry Shearer, backed by the heavy duty millions he made voicing characters for The Simpsons, has spearheaded a $400 million lawsuit against the movie's owner, the French conglomerate Vivendi. And that got us wondering . . . do the fans at IRS have a stake in this particular fight?
Hits like Avatar, Titanic, and Star Wars: The Force Awakens can gross over $2 billion. Yet it's a strange Hollywood rule that as much as a movie might gross, there's never any net for back-end participants to share, never any big bottom line to share with the "talent." Return of the Jedi has earned $500 million since 1983, yet failed to show a profit. Harry Potter and the Order of the Phoenix "lost" $170 million.
How do the studios do it? Shearer and his bandmates specifically accuse Vivendi of "cross-collateralizing unsuccessful films bundled with This Is Spinal Tap." This is when a studio sells a package of films overseas that includes both stinkers and hits, and assigns the same licensing fee to each of them. It has the effect of shifting income from the hits to subsidize losses from the stinkers. Other tricks seem to date back as far as Stonehenge, like undocumented marketing expenses and other improper deductions.
Today's lawsuit isn't the first time someone has challenged Hollywood's accounting games. In 1982, humorist Art Buchwald wrote a screenplay he titled It's a Crude, Crude World. Six years later, Paramount Pictures released it as Coming to America, and credited Eddie Murphy as author. Buchwald sued for story credit and won — but Paramount argued that the movie, which grossed $288 million, still managed to lose money. Having defeated the lawyers, Buchwald wound up settling for $900,000 rather than take on the accountants.
And why would the IRS care? Well, for the most part, they don't. Studios might play accounting games that keep taxable income out of the talent's pockets — but most of that income winds up taxable to the studio or its subsidiaries. As long as the income stays here in America, the critics at the IRS still get their share.
We make no representation that we could ever help you navigate the ins and outs of Hollywood studio contracts. Fortunately, it's a lot easier to avoid wasting money on taxes you don't have to pay. Call us for a plan, and we'll see how high we can crank up the savings!
June 14th 2017
Economic inequality is a hot topic in today's world. Researchers here and abroad consistently show the top 1% of earners gobbling a disproportionate share of gains throughout the world. This trend has more and more thinkers debating what to do about it. Do we redistribute the pie, so that everyone has a more equal share? Or do we grow it so that everyone can have a bigger slice? (There, we've...
Does Your Money Need a Passport?
Economic inequality is a hot topic in today's world. Researchers here and abroad consistently show the top 1% of earners gobbling a disproportionate share of gains throughout the world. This trend has more and more thinkers debating what to do about it. Do we redistribute the pie, so that everyone has a more equal share? Or do we grow it so that everyone can have a bigger slice? (There, we've just summed up three centuries worth of political economy in two short sentences!)
Now there's new research that shows the old research actually understates that divide. (Don't you just love when the research changes?) Last month, a team of professors published a paper that reveals another gap between the rich and the poor — the rich hide a larger proportion of their income from the tax man.
In 2015, the International Consortium of Investigative Journalists analyzed data covering 30,000 accounts and $100 billion of assets held at international banking giant HSBC's Swiss private banking department. In 2016, the same group analyzed data on 22,000 shell companies established by the Panama-based law firm of Mossack Fonseca. The professors matched the information from those leaks to population-wide tax and wealth records from Norway, Sweden, and Denmark.
Scandinavians are known for their democratic socialist philosophies, relative equality, and overall happiness. (The 2017 World Happiness Report ranks Norway first, Denmark second, and Sweden ninth.) Surely the rich people in those countries are happy to support their less-fortunate brethren through taxes, right?
Well, not so much. (With all that socialism and equality, it might surprise you to learn that there even are rich people in that part of the world.) While the overall tax evasion rate is 3% in Scandinavia, that rises to 30% for the top 0.01% of taxpayers, which includes households with more than $40 million in net worth.
How does that correlate to inequality? In Norway, previous figures had estimated that the country's wealthiest 300 families control 8% of the country's net worth. The new data suggest those families keep a full third of their wealth offshore, which means they actually control at least 10% of the country's wealth. Researchers just didn't know where it was hiding!
Over 1% of the Scandinavian families use HSBC's Swiss private banking services. Another 1% own a shell company created by Mossack Fonseca. One percent may not sound like a lot. But remember, HSBC is just one Swiss bank out of over 300, and Mossack Fonseca is just one law firm out of countless more.
The paper's authors found that, "In practice, about 95% of all the individuals on the HSBC list that could be matched to a tax return did not report their Swiss bank account." In fact, when Norway and Sweden passed tax amnesty laws letting scofflaws pay reduced penalties, over 8,000 taxpayers 'fessed up. And further, the numbers suggest that 15% of the wealthiest households have stashed at least some money abroad.
Here's some good news for those of us who live in the U.S. and don't have $40 million to worry about. Our country is actually considered a tax haven by many foreigners. That means we have countless opportunities to save taxes without sending our money on a Swiss holiday. All you really need is a plan. So call us, and see if we can help send you on vacation!
June 7th 2017
What scares Americans most? It's not the IRS, or public speaking, or even sharks. No, the answer, as you probably guessed, is snakes. Gallup once polled 1,016 American adults, and found that fully 51% of us are afraid of the scaly, coldblooded carnivores. Snakes have been bad guys going as far back as the Book of Genesis, when the serpent tempted Eve with an apple. And they've terrorized the...
Trigger Warning: Snakes
What scares Americans most? It's not the IRS, or public speaking, or even sharks. No, the answer, as you probably guessed, is snakes. Gallup once polled 1,016 American adults, and found that fully 51% of us are afraid of the scaly, coldblooded carnivores. Snakes have been bad guys going as far back as the Book of Genesis, when the serpent tempted Eve with an apple. And they've terrorized the rest us ever since. Who can forget Samuel L. Jackson, snapping out the only line anyone remembers from Snakes on a Plane, declaring "I have HAD it with these @#$%^ SNAKES on this $%^$@ PLANE!" or words to that effect.
If you're part of that 51%, you won't be happy to hear the latest news from Mother Nature. Last month, a scientist announced he had observed a species of snake, the Cuban boa, that hunts in packs, using teamwork to catch their prey. He watched the three-to-six foot serpents join each other to hang upside down from roof of a cave to create a "curtain" and snatch bats trying to fly out. (Last we heard, he was spotted sprinting headlong away from the cave, screaming at the top of his lungs.)
If this news hasn't sent you sprinting from the room, you're probably wondering what any of this has to do with taxes. We'll confess, we took the "snakes hunting in packs" story to test our own scientific hypothesis that we can find a tax connection anywhere. And it did take a few minutes on Google. But we did it!
So . . . halfway around the globe, the world's most populous country is struggling to stamp out a pattern of petty corruption and bribery that keeps it stuck in the ranks "emerging democracies." Mother India currently ranks 79th out of 176 on Transparency International's corruption index. This puts India just behind that paragon of transparency Turkey, tied with Brazil, and ahead of the petty crooks in Albania and Jamaica.
What does that mean for daily life? Bribery in India is everywhere. Want to open a business, get a drivers license, or schedule an appointment with a doctor? Pay up. Anticorruption campaigns have helped tame the problem, including one clever effort to post Youtube videos of ordinary citizens naming and shaming corrupt officials. But old habits die hard, especially away from the capital in New Delhi.
Hukkul Khan and Ramkul Ram are two farmers from Narharpur village in Uttar Pradash, a northern state bordering Nepal. The men wanted tax records for their land, but officials refused to turn them over without the usual bribes. And Khan is known in his village as a snake charmer. So one day, the farmers showed up at the tax office with three bags full of snakes. There were about 40 in total, all different sizes and species, including at least four deadly cobras.
One state official said they started climbing up the tables and chairs. "There was total chaos. Hundreds of people gathered outside the room, some of them with sticks in their hands, shouting that the snakes should be killed." Fortunately, no tax collectors or taxpayers were harmed during the making of the farmers' stunt. Police and forest officials rounded up the snakes, and everyone who wasn't in that office had a good laugh. (As Indiana Jones said in Raiders of the Lost Ark, "Snakes . . . why'd it have to be snakes?")
We understand that for some people, the tax code is as scary as a bag full of boa constrictors. But you don't need a sack full of snakes to pay less. You just need a plan. Call us and see how we make it less terrifying!
May 30th 2017
November 2nd, 1995, was a delicious day in television history. That's when Jerry Seinfeld and the rest of his gang introduced us to the "Soup Nazi", a stern-looking chef who demands his customers follow his obsessive rules for lining up and ordering. The Soup Nazi didn't win any awards for customer service, but his soup was so good...
No Soup for You!
November 2nd, 1995, was a delicious day in television history. That's when Jerry Seinfeld and the rest of his gang introduced us to the "Soup Nazi", a stern-looking chef who demands his customers follow his obsessive rules for lining up and ordering. The Soup Nazi didn't win any awards for customer service, but his soup was so good that customers lined up around the block for it anyway. The episode scored an Emmy for Larry Thomas, the actor who played the character. And it led to fame and fortune for Al Yeganah, the real-life "Soup Nazi" who operated a restaurant on Manhattan's West 55th Street that the character was based on.
Fast-forward to now. The Original Soup Man, based on Staten Island, has bought the rights to the Soup Nazi's name and his recipes. The company manages three locations plus an online operation, and its stock even trades on the over-the-counter market (under the symbol SOUP, naturally). But all is not well in Soup Heaven. The company faces financial problems that no amount of Lobster Bisque or All-Natural Gluten Free Lentil can solve. So the Soup Man found himself borrowing some gold "bouillion" from our friends at the IRS.
Here's the scoop. Employers are responsible for withholding income tax and payroll tax from their employees' wages. They're also responsible for spooning out their own share of payroll taxes on those wages. Employers who find themselves in financial trouble sometimes "borrow" from the IRS by failing to make those deposits. (Just until business gets better, they tell themselves. Right . . . . ) Failure to pay those taxes deprives the government of much-needed revenue, of course. And it cheats those employees out of future social security benefits.
For those reasons, the IRS is even more obsessive about collecting payroll taxes than the Soup Nazi is about ordering his soup. When employers fail to pay, the IRS springs into action. They can hold "responsible persons" with an ownership in the business or signature authority over its accounts personally responsible for payment. They'll happily hit you with penalties equal to 100% of the tax not paid. And they have no problem souping up the pressure to hold you personally liable even if you had no idea the taxes weren't being paid. (Did you just discover your payroll service made off with the money? Stinks to be you . . . ladle up!)
You can probably see where we're heading. On May 23, federal prosecutors indicted Soup Man's chief financial officer, Robert Bertrand, on 20 counts of failing to pay. They reported that from 2010 to 2014, he paid some employees in unreported cash, and others in unreported stock awards to the tune of $2.8 million. And they alleged that his actions fleeced the government out of $593,971.52.
Bertrand pled not guilty and walked out of court on $50,000 bond. But he's stewing at the thought of five years of meals in a place where the soup probably isn't very tasty. And he'll have a hard time pleading ignorance — the indictment reports that his outside auditor warned him as far back as 2012 that he needed to report those payments. (At least you can still buy the soup on Amazon.com!)
Fortunately for the rest of us, there's no need to risk years of watery, tasteless soup in order to pay less tax. You just need a plan. That's where we come in, and we can promise better service than the Soup Nazi. Call us when you're ready to discover our recipe for Savings Gumbo!
May 24th 2017
Summer is almost here, and sports fans across America have a lot to look forward to. Basketball's 13-month-long season is (finally) starting to heat up. Hockey playoffs are coming to a close. Baseball is in full swing, and NFLers are about to report to training camps. Stop at any bar or water cooler in the land, and you'll hear talk of wins, losses, and plays that you just have to...
Hitting a Tax Gapper
Summer is almost here, and sports fans across America have a lot to look forward to. Basketball's 13-month-long season is (finally) starting to heat up. Hockey playoffs are coming to a close. Baseball is in full swing, and NFLers are about to report to training camps. Stop at any bar or water cooler in the land, and you'll hear talk of wins, losses, and plays that you just have to see.
Fans and analysts have all sorts of statistics they can use to measure (and argue about) their teams' performance. "Turf investors" have relied on The Daily Racing Form for over a century. Baseball is famed for legions of "sabermetricians," who obsess over statistics like WAR (Wins Above Replacement), BABIP (Batting Average on Balls in Play), and LWCT (Largest Wad Of Chewing Tobacco). Football and basketball too, even hockey, all lend themselves to measures far beyond the mere score at the end of the game.
But there's one more sports statistic we might need to evaluate our favorite team by, and that's SITR (State Income Tax Rate).
Erik Hembre is an Assistant Professor of Economics at the University of Illinois at Chicago. He's just released a paper titled "Income Taxes and Team Performance: Do They Matter?" (He's also probably lined himself up a sweet gig with a struggling team somewhere if the whole "assistant professor" thing doesn't work out.)
Hembre started his analysis with win-loss records from the last 40 years of the "Big Four" professional sports. Next, he added data on state top marginal income tax rates. Finally, he regressed the tax rates through the win percentages to estimate their effect, using the following equation:
Yit = β0 + β1πit + β2Xit + εit
So the winning percentage Yit for team i in year t is a function of . . . you know what, just the sight of those Greek letters probably makes your head hurt too, so let's just skip it!
Here's the final score: "state income tax rates significantly impact team performance." In the NBA, where the tax effect is greatest, moving a team from high-tax Minnesota to tax-free Florida should yield 4.7 more wins per year. That's the equivalent of swapping a mediocre benchwarmer for a 2015 version of Draymond Green. In baseball, where there's no salary cap and the tax effect is lowest, the same move would still add 1.6 Ws per year. And this effect is accelerating over time as free agents gain more mobility across teams.
Why would state tax rates matter? Hembre speculates that low rates make it easier for teams to bid for players. State rates range from zero to 14%. But after players have paid agents, managers, and federal taxes, "the effective rate of state taxes may be more than twice as high as the nominal rate."
You may not think you have a lot in common with athletes weighing seven- and eight-figure contracts. But when they look at state income tax rates to compare offers, they're doing tax planning. And you can do that same sort of planning yourself, even without those offers. So call us when you're ready to play ball, and let's see if we can help you hit a grand slam!
May 17th 2017
Right now, all across America, thousands of talented youngsters are dreaming of careers in performing arts. Whether they aspire to be the next Meryl Streep, or Taylor Swift, or Lin-Manuel Miranda, they understand the odds of success are long. But they still dream that one day they'll find themselves in the audience at the Oscars, the Grammys, or the Tonys, waiting with their hearts in their...
"And the Award Goes To . . . ."
Right now, all across America, thousands of talented youngsters are dreaming of careers in performing arts. Whether they aspire to be the next Meryl Streep, or Taylor Swift, or Lin-Manuel Miranda, they understand the odds of success are long. But they still dream that one day they'll find themselves in the audience at the Oscars, the Grammys, or the Tonys, waiting with their hearts in their throats as a tuxedo-clad presenter opens an envelope and reads their name.
At the same time, thousands more Americans grow up dreaming of careers in law enforcement. These future Elliot Nesses aren't looking for the red carpets or glamour of Hollywood. But there are awards waiting for the best of them, too. And this year, our friends at the IRS are basking in those bright lights.
The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Treasury dedicated to protecting the financial system's integrity. Every year, it hosts a Law Enforcement Awards ceremony at the Treasury's headquarters. The program includes awards in six categories: suspicious activity reporting, transnational organized crime, transnational security threats, cyber threats, significant fraud, and third-party money laundering. (Six awards should make for a much shorter awards show than the Oscars, even after allowing time for the musical numbers!)
This year, incoming Treasury Secretary Steven Mnuchin hosted the awards for the first time. (No word on whether paparazzi quizzed him about his outfit, but we suspect not.) And when he opened the envelope for the cyber threat category, the it was the IRS Criminal Investigation unit that took home the trophy, for its work leading the multi-agency task force that took down the Silk Road online marketplace.
Technology has disrupted all sorts of industries. Just look at what Uber has done to taxi cabs! So it shouldn't come as a surprise that innovators have disrupted the neighborhood drug dealer, too. It all centered on a site called the Silk Road, where buyers and sellers connected to buy drugs like methamphetamines and marijuana. Buyers used "the onion router," or TOR, to mask their IP addresses. They paid in bitcoin to hide their sources and even gave dealers "star ratings" like they would praise a local deli on Yelp.
Unfortunately, the high-tech pharmaceutical retailers lining that silk road had to rely on the decidedly old-school Postal Service, founded back in 1775 by Benjamin Franklin, to deliver the goods. Postal inspectors discovered that as many as 435 suspicious packages had come from the same place. The IRS-led task force then secured the necessary warrants, intercepted shipments, and made their case. (Ruh roh.)
Ironically, the targets pled guilty to drug crimes and money laundering, not tax crimes. That's not unusual, though — IRS special agents regularly lends their expertise to non-tax investigations. It's also worth mentioning that this was the first case in this particular district where money laundering charges were based on bitcoin transactions, which shows how law enforcement keeps up with developments in crime technology.
The odds that you'll find yourself on the receiving end of a FinCen Law Enforcement Award are probably as long as your odds of someday accepting an Oscar. But if you haven't done your planning, the odds are good that you're paying more tax than you have to. So call us when you're ready to pay less. You'll be glad you did, even if there's no red carpet waiting for you!
May 10th 2017
Every year on the first Saturday in May, an enormous crowd of socialites, "turf investors," and people just looking for a party descends on Churchill Downs for the Kentucky Derby. It's an unforgettable pageant of mint juleps, fashionable hats, and the most exciting two minutes in sports. This year, the favorite Always Dreaming leaped first out of the gate, left challenger Battle of Midway...
Taxing the Roses
Every year on the first Saturday in May, an enormous crowd of socialites, "turf investors," and people just looking for a party descends on Churchill Downs for the Kentucky Derby. It's an unforgettable pageant of mint juleps, fashionable hats, and the most exciting two minutes in sports. This year, the favorite Always Dreaming leaped first out of the gate, left challenger Battle of Midway after a mile, and sploshed the rest of the way down the muddy backstretch to his victory. The winner paid $11.40 on a $2 bet to win and landed his owners a tidy $1,635,800 purse.
A horse is a horse, of course, of course, and no one can run like a horse, of course. But while Always Dreaming gets the glory and the roses, he couldn't do it all by himself. Who helped? There were his owners, Anthony Bonomo and Vincent Viola, who spotted his potential. There was his trainer, Todd Pletcher, and his jockey, John Velazquez, each of whom had already won a Kentucky Derby. And, of course, there was the U.S. tax code, whose generous subsidies help make horse racing possible in the first place.
Here's the dark reality behind racing's bright silks. Only one horse gets to claim that seven-figure Derby purse in a year, and most horses never clear a profit in their life. For the majority of owners, "investing" in racehorses is like "investing" in lottery tickets. And for most of them, that's ok — their horses are just a (very expensive) hobby.
Here's where the handicappers at the IRS come in. Code Section 183 — also known as the "hobby loss" rule — says that you can deduct losses from your business against your other income — but you can't deduct losses from your hobby. So . . . how do you know the difference? The basic rule is that you have to enter into the activity with an intent to make a profit. You don't even have to have an expectation as long as you have the necessary intent.
The code offers a helpful rule of thumb to make that determination easier. For most activities, if you make a profit in three out of five years, you're presumed to be engaging in it with an intent to make a profit. (That's not a hard and fast rule, by the way, and some tax professionals will tell you that if you don't make a profit in three of those five years, your losses are scratched. That's not actually true — it just means you have to work a little harder to prove your bona fide business intent.)
But there's one kind of business that gets a special pass on the rules, and gets to make hay just two out of seven years to take advantage of that for-profit presumption. You've probably already guessed — it's activities "which consist in major part of the breeding, training, showing, or racing of horses."
The two-out-of-seven standard isn't the only break racehorses get. The tax code lets you depreciate them the same way they depreciate a trailer or a barn. Most horses depreciate over seven years — but racehorses depreciate over just three. (Why? Because you're buying them to make money.) Recovering your investment faster lets you use the savings to buy more horses. (It's sort of like taking winning lottery tickets and using the proceeds to buy more lottery tickets. At some point, you really ought to take your winnings off the table.)
Want a hot tip on a sure thing? There's no need to gamble on your taxes when a smart plan can help you pay less. So call us when you're ready to finish in the money!
May 3rd 2017
Americans are great at taking perfectly serviceable holidays and turning them into excuses for parties. On St. Patrick's Day, millions of Irish-for-a-day drinkers belly up to their favorite fake Irish bar to down pints of Guinness and shots of Jameson. Next on the calendar is Cinco de Mayo, when all those same St. Paddy's fans become Mexicans for a day to down bottles of Corona and pitchers...
The Taxing History Behind Cinco de Mayo
Americans are great at taking perfectly serviceable holidays and turning them into excuses for parties. On St. Patrick's Day, millions of Irish-for-a-day drinkers belly up to their favorite fake Irish bar to down pints of Guinness and shots of Jameson. Next on the calendar is Cinco de Mayo, when all those same St. Paddy's fans become Mexicans for a day to down bottles of Corona and pitchers of margaritas. (We can't wait to see what the hospitality industry dreams up when they discover Talk Like a Pirate Day lurking on the September calendar.)
You may already have Cinco de Mayo reservations penciled into your calendar. But how many know the role that taxes played in putting those tangy salt-rimmed cocktails on your Happy Hour menu?
Back in 1862, we were struggling in the midst of a wrenching civil war. And south of the border, Mexico had just finished one of their own. The ruling liberals had passed a series of laws that, among other things, let the government tax the dominant Catholic church. The rival conservatives objected, with the dispute ultimately leading to war. After three years of fighting, the liberals prevailed. But incoming president Benito Juarez found his Treasury empty, and he issued a decree suspending foreign debt repayment for two years.
French Emperor Napoleon III wasn't willing to just write off the loss. More importantly, he also spied a chance to take advantage of the turmoil here in the U.S. to reestablish French influence in the western hemisphere. So he sent his army to the port of Veracruz to collect what Mexico owed. And his troops began marching down the road to Mexico City. Unfortunately for the French, that road led through the hilltop town of Puebla de Los Angeles.
On May 5 — Cinco de Mayo — 6,000 French troops marched up Guadalupe Hill to take the town from 2,000 poorly equipped defenders. Everyone expected a rout — but it was the Mexicans who did the routing, firing downhill to pick off the advancers. The few French who reached the top faced machete-wielding Zacapoaxtla Indians, with depressingly predictable results. It was a small but symbolic victory that gave the Mexicans hope that they could repel the European invaders.
Victory was short-lived. A year later, the French reached Mexico City and installed the Austrian Archduke Ferdinand Maximilian as Emperor of Mexico. But France wasn't willing to actually support their new puppet monarch with their army. So, after three more years of chaos, Ferdinand and his top generals found themselves on the business end of a firing squad.
Cinco de Mayo remained a little-noticed holiday until the 1980s, when beer marketers began using it as an excuse to promote their sudsy wares. Ironically, it's barely celebrated at all in Mexico.
We realize it's a stretch to say that Mexico's decision to tax the church led to your Cinco de Mayo celebration. But when you're in the tax business, like we are, you see way too many things through that lens. And isn't that what you want? A vigilant sentry, standing guard over your finances, wielding tax-saving strategies like a tribe of bloodthirsty Zacapoaxtalas wielding machetes? So call us when you're ready to celebrate paying less . . . and have a margarita on us!
April 26th 2017
We've just made it through our annual exercise in self-flagellation known as "tax filing season." And who's fault is that? Don't blame the IRS, blame the Congress that wrote the four million-odd words that make up the tax code. So it's always refreshing to see someone inside that particular lion's den take a critical look at what Congress has wrought. Jeff Flake is a freshman Senator...
Why Did the Loophole Cross the Road?
We've just made it through our annual exercise in self-flagellation known as "tax filing season." And who's fault is that? Don't blame the IRS, blame the Congress that wrote the four million-odd words that make up the tax code. So it's always refreshing to see someone inside that particular lion's den take a critical look at what Congress has wrought.
Jeff Flake is a freshman Senator from Arizona who's not interested in taking responsibility for the current system, which was written mainly by men who came of age when Packards and Studebakers filled the streets. This month, he issued a report called "Tax Rackets" that takes aim at so-called "outlandish loopholes" that taxpayers like alpaca farmers, magazine publishers, and golf course operators use to legally lower their bills.
Flake shovels a steaming load of scorn on Section 45 credits for programs to create energy from "open loop biomass" — otherwise known as chicken "litter." Chicken farmers in the DelMarVa peninsula, which includes Delaware, Maryland's eastern shore, and the Virginia peninsula, produce 550,000 tons of droppings every year. They've been using it for fertilizer. But now the runoff is polluting Chesapeake Bay. So the area's representatives hatched legislation offering tax credits for selling the "litter" to power plants.
The problem, says Flake, is that the initiative isn't "everything it was cracked up to be." There are already plenty of government subsidies for poop-to-power programs. (Flake's words, not ours.) But nobody seems to want them. "Plans to build the power plants have ruffled the feathers of the very taxpayers being forced to subsidize the energy they would produce. The squawking by citizens caused [one litter-to-energy producer] to scratch plans to build plants in Virginia, North Carolina, and Georgia." Flake concludes that, "subsidizing energy companies for producing poultry poop power is a bird brained idea that smells like a rotten egg."
Flake also fires shots at the developers of American Dreamland, who are requesting tax-subsidized municipal bonds to finish a $5 billion mall in (where else) New Jersey. We're not talking your usual soulless suburban shopping center here. Dreamland will include three million square feet of space, 30,000 parking spots, 450 shops and restaurants, an indoor waterpark, a roller coaster, a Ferris wheel, and an 800-foot indoor ski slope. Developers claim it will create 11,000 jobs and generate $1.5 billion in annual sales. What's not to like?
Except . . . two developers already dropped $2 billion on the boondoggle before slinking off in defeat. The third one wants a billion more in subsidized bonds to cross the finish line. It's going up in the only county left in America that still outlaws shopping on Sunday. And millions of shoppers are giving up entirely on mall traffic, mall crowds, and mall hype to order online. The latest developer boasts that "it's going to be the No. 1 tourist destination, bar none, in the world." (But he can't actually believe that, can he?)
Flake says the subsidies he's exposed will cost taxpayers $50 billion over the next decade. The challenge from his perspective is getting Congress to do something about it. It's been years since Congress could even walk and chew gum at the same time, and legislation today moves slower than geology.
Good thing there's a silver lining lurking deep inside this story. Sure, the current code is a mess. But at least we understand it. So you don't have to pour your hard-earned dollars into poop-to-power programs to pay less. You just need a plan. So call us, and see how much more you can take to the newest mall!
April 19th 2017
In 1935, Americans were mired in the depths of the Great Depression. Gross domestic product had shrunk from $103.6 billion in 1929 to $73.3 billion. Unemployment stood at a horrendous 20.1%. Even the suicide rate was higher during those dark years. And on February 6th of that year, the Parker Brothers company started selling an escape from all that misery: a family-friendly board game that...
In 1935, Americans were mired in the depths of the Great Depression. Gross domestic product had shrunk from $103.6 billion in 1929 to $73.3 billion. Unemployment stood at a horrendous 20.1%. Even the suicide rate was higher during those dark years. And on February 6th of that year, the Parker Brothers company started selling an escape from all that misery: a family-friendly board game that anyone could afford, called Monopoly.
When most of us picture the Monopoly board, we see the familiar rows of streets, named after those in Atlantic City: Boardwalk, Park Place, and all the rest. (Some contrarian always says that lowly Baltic Avenue, priced at just $60, is their favorite. That someone always goes bankrupt first.) Some players prefer "Chance," "Community Chest," or taking a ride on the Reading Railroad. And if someone tells you their favorite squares are the Luxury Tax (pay $75) or Income Tax (pay $200 or 10%), you give them a funny look and wonder what went wrong in their childhood.
But how many of you know that Monopoly was originally created back in 1903 to illustrate a theory about taxes?
Elizabeth "Lizzie" Magie was a stenographer, writer, comedienne, actress, and engineer. In 1903, she patented The Landlord's Game to reveal the evils of "land monopolism" — basically, profiting from the rent you can charge for the use of land. (Evil, right?) Her solution was the philosopher Henry George's "single-tax" theory, which holds that people should own the fruit of their own labor, but that land and natural resources should be shared equally by everyone. George believed that taxing land value is the fairest form of tax, and a properly-administered land-value tax can help society reduce taxes on labor or other investments.
"Georgism," as it's now called, may sound downright Marxist to contemporary ears. But economists argue that a land-value tax is more efficient than income or sales taxes because it doesn't reduce productivity. Adam Smith advocated for a land-value tax in The Wealth of Nations. And Milton Friedman, certainly nobody's idea of a commie pinko, called it the "least bad tax" that government can impose.
Ironically, Monopoly's "income" tax — 10% of your assets, capped at $200 — isn't an income tax at all. It's a wealth tax. And it takes the exact opposite approach of the President occupying the White House at the time the game debuted. The Revenue Act of 1935 applied a special 75% rate on income above $5 million, although just one lucky winner — Standard Oil heir John D. Rockefeller, Jr. — actually paid it.
(As high as Roosevelt's depression-era taxes sound to us today, he wanted to go even further after Pearl Harbor. He argued in 1942 that in a time of such grave national danger, "no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year (about $350,000 in today's dollars). Roosevelt's simple solution? A 100% top rate on anything above that amount!)
Today, of course, "Monopoly money" has become synonymous with worthless paper. And paying your taxes is about as fun as landing on Boardwalk, with a hotel! But paying less is no game. It takes careful work and planning. So call us when you're ready to play — do not pass Go!
April 11th 2017
In 1982, Unilever came up with a catchy jingle to sell Klondike bars, a sort of Eskimo pie without a stick: "What would you do for a Klondike Bar?" The challenges weren't especially grueling. Would you make monkey sounds? Act like a chicken? In one spot, a boneheaded dudebro actually listened to his wife talk (about painting the foyer yellow) for five seconds to get his hands on the creamy...
What Would You Do for a Klondike Bar?
In 1982, Unilever came up with a catchy jingle to sell Klondike bars, a sort of Eskimo pie without a stick: "What would you do for a Klondike Bar?" The challenges weren't especially grueling. Would you make monkey sounds? Act like a chicken? In one spot, a boneheaded dudebro actually listened to his wife talk (about painting the foyer yellow) for five seconds to get his hands on the creamy treat.
Now wallethub.com, a personal finance website, has updated the question, if not the actual jingle. But WalletHub doesn't care what you'd do for dessert. They surveyed 500 Americans to discover what you would do to avoid taxes. The answers might surprise you!
What would you do to avoid paying taxes for the rest of your life? 20% would get an "IRS" tattoo. 16% would move abroad. 10% would give up talking for six months. 4% would sell a kidney. And 2% would spend a year in jail!
Who do we like more than the IRS? Former President Barack Obama took home the gold with 56%, with Pope Francis bring home the silver at 50%. Justin Bieber got 15%, Kim Kardashian got 13%, and even OJ Simpson placed at 7%. (You've really got to detest the IRS to like OJ Simpson more!)
What would you rather do than prepare your taxes? 73% said laundry, 56% said cut the grass, and 50% said teach their children to budget. Ok, those sound easy enough — except maybe the "budget" part. But 40% said they'd rather change a baby's diaper, 30% would rather talk to their kids about sex, 12% would rather spend a night in the pokey, and 9% would rather break their arm!
Would you hide money offshore? 81% said no, even if they knew they wouldn't get caught. Of course, that leaves a full 19% we apparently need to look out for!
What scares you most about taxes? 32% said identity theft, which seems well-founded these days. 30% said making a math mistake. 20% feared not having enough money to pay. And 18% worried about getting audited. (The actual audit rate is sitting at a historic low of 1%.)
What's your favorite government institution? The Department of Veterans Affairs came in at number one, with the Department of Education, FBI, CIA, Federal Reserve, and White House all beating the IRS. Only Congress came in even lower.
GoBankingRates.com also asked a group of Americans what they would do to avoid taxes. 32% would stand up and perform five karaoke songs in front of their co-workers. 18% would go without wifi for a year, which wouldn't be much of a sacrifice to the 90% of humanity that lived before wifi was even a thing. 13% would gain 20 pounds, 11% would let their web browsing history be made public, and 6% were willing to smell like a skunk for six months!
Why go to the depths of such unpleasantness? We can't promise you a tax-free future, and tax prep won't ever be fun. But we can tell you it doesn't have to be as hard. You just need a plan to pay the minimum amount allowed. And that's where we come in. We promise it's easier to sit down with us than it is to waste money on taxes you don't have to pay!
April 4th 2017
Baseball is back! On April 2, the Tampa Bay Devil Rays spanked the visiting New York Yankees, 7-3, to kick off the 2017 season. Later that day, the defending World Series champion Chicago Cubbies fell to their usual last place in the National League Central. And Cincinnati Reds fans are still bitter that they don't get to host the season's first game like they did for so many...
Baseball is back! On April 2, the Tampa Bay Devil Rays spanked the visiting New York Yankees, 7-3, to kick off the 2017 season. Later that day, the defending World Series champion Chicago Cubbies fell to their usual last place in the National League Central. And Cincinnati Reds fans are still bitter that they don't get to host the season's first game like they did for so many years.
Everyone loves baseball, even the IRS! We realize that when you think of baseball stats, you think of batting averages, slugging percentages, and "wins above replacement." But the nation's tax collectors have some baseball stats they love to share, too. So let's take a quick look:
Opening Day team payrolls topped $4 billion for the first time ever this year. The league minimum is out of the park at $535,000, which is enough that the IRS scoops up 39.6% of those dollars. Throw in paychecks for managers, coaches, trainers, and front-office employees, and we're talking easily more than $1.5 billion in income taxes, plus millions more in payroll taxes. And that doesn't begin to count taxes on the billions more that players earn in endorsements.
Players aren't the only ones watching their incomes climb. Total team revenue from ticket sales, broadcast rights, and licensed apparel approached $10 billion last year. And while owners don't publish their own stats the way they publish their players', Forbes estimates the average team is worth $1.3 billion.
Television networks pay billions for the rights to broadcast games. Then they turn around and sell advertising to pay for those rights for billions more. The difference between the revenue and the rights winds up taxed at corporate rates of up to 35%.
What's a ball game without peanuts and Cracker Jack? (Or beer, at a price per cup that's more than a six pack at your local store?) The usual fan spends about $20 in concessions per game, which yields millions more in sales taxes, excise taxes, and income taxes on those ballpark markups.
Baseball has generated its fair share of quotable quotes over the years. There are even a few tax quotes lurking in that lore, although we're not sure Yogi Berra ever said anything about the IRS:
"Baseball is a skilled game. It's America's game — it, and high taxes."
"Look, we [baseball team owners] play the Star Spangled Banner before every game. You want us to pay income taxes, too?"
Bill Veeck (Owner, Chicago Cubs)
While we're on the topic, how does your game plan looking this season? Have you even stepped up to the plate? Or are you still warming the bench? Remember that we're here to help with a complete roster of infield and outfield plays. We've got the depth and experience you need to hit the home run you want come April 15!
March 28th 2017
Last week marked the end of an era as David Rockefeller, the last grandchild of Standard Oil baron John D. Rockefeller, died at age 101. Rockefeller, whose name was once synonymous with "wealth," symbolized the eastern establishment in all its glory. His death marks a last living link to an age of robber barons-turned-philanthropists whose fortunes still shape our nation. Patriarch...
Rich as Rockefeller
Last week marked the end of an era as David Rockefeller, the last grandchild of Standard Oil baron John D. Rockefeller, died at age 101. Rockefeller, whose name was once synonymous with "wealth," symbolized the eastern establishment in all its glory. His death marks a last living link to an age of robber barons-turned-philanthropists whose fortunes still shape our nation.
Patriarch John D. Rockefeller launched the family fortune before Uncle Sam launched the income tax, which gave "Senior" a big head start. He started out in 1855 as a 16-year-old assistant bookkeeper in Cleveland, Ohio, with a 10-week accounting course under his belt. By 1911, he controlled 90% of America's oil refining. The Supreme Court eventually broke his company into 34 separate pieces. But much to Rockefeller's delight, those pieces became worth more than the original whole. By the time he died in 1937, he was worth the equivalent of $340 billion in today's dollars.
Rockefeller had always been generous. He gave away six percent of his earnings even at age 16. But his fortune helped him really ratchet up his giving. He endowed the University of Chicago with a nondeductible gift equal to $2 billion in today's dollars. (That's because there wasn't any tax to worry about then.) He founded Rockefeller University and made major gifts to Central Philippine University and Spelman College.
Rockefeller's son, John D. Jr, wasn't quite so lucky. In 1923, when the IRS published everyone's tax bills, he ranked #1 in the country, paying $7,435,169. In 1924, he ranked #1 again. And when the Wealth Tax Act of 1935 applied a special rate on income above $5 million, there was only American who paid it — Rockefeller. Junior diversified the family's holdings, financing the 16-building Rockefeller Center complex in midtown Manhattan and helping make Chase Manhattan Bank the world's largest.
By then, Junior was taking advantage of charitable deductions for his own philanthropy. He gave $537 million to charity over his life, more than the $240 million he gave to his own family. He donated the land for New York's Museum of Modern Art and the United Nations headquarters, and gave generously to renovate Colonial Williamsburg in Virginia.
David Rockefeller might have become like those spoiled rich brats you see on Instagram and reality television. He grew up in an eight-story house, the biggest ever built in New York. (Seven stories are for peasants, right?) He and his brothers roller-skated down Fifth Avenue, trailed by a limousine in case they got tired, and vacationed at the family's 107-room cottage in Maine. But as an adult he expanded the family portfolio internationally, cutting banking deals with the Soviets, Chinese, and various oil-rich dictators. He was active in the Council on Foreign Relations and the Trilateral Commission. (If the Illuminati are real, you probably could have found David Rockefeller lurking somewhere near the center of it all.)
Time, taxes, and 150+ descendants have whittled down the Rockefeller fortune. Forbes magazine estimates the family is worth "just" $11 billion today. Ironically, two of the family's charitable funds have announced that they will be selling all their fossil fuel investments as part of their commitment to fight climate change.
We realize you don't have Rockefeller riches to protect. But we know you value what you have, and we know that smart tax planning is one of the best ways to preserve it. So call us when you're ready to pay less!
March 21st 2017
For decades now, governments across the world have struggled with where to impose taxes to raise the revenue they need to offer modern services. Should they simply raise rates? Should they broaden the base by eliminating loopholes and deductions? Should they sock it to smokers, drinkers, or other disfavored groups? How about entirely new levies designed to influence behaviors, like a carbon...
For decades now, governments across the world have struggled with where to impose taxes to raise the revenue they need to offer modern services. Should they simply raise rates? Should they broaden the base by eliminating loopholes and deductions? Should they sock it to smokers, drinkers, or other disfavored groups? How about entirely new levies designed to influence behaviors, like a carbon tax or soda tax? The smartest minds in politics and economics have grappled with these questions. Not only have they failed to make everyone happy, they've failed to make anyone happy.
At the same time, writers and filmmakers have worked to populate our imagination with a variety of more-or-less human robots. These have included the Laurel and Hardy-esque R2D2 and C3PO of Star Wars fame, the seductively human replicants of Blade Runner, and the self-aware killers of Westworld.
Sooooo . . . how long did you think it would take for some mad genius to make a mashup of taxes and robots? Well, today is that day, and Microsoft founder Bill Gates is that genius. His proposal is exactly the sort of thing you'd expect from a guy who dropped out of college to lead the personal computer revolution. Forget trying to squeeze more taxes out of people — let's just tax the robots!
"Right now, the human worker who does, say, $50,000 worth of work in a factory, that income is taxed and you get income tax, social security tax, all those things. If a robot comes in to do the same thing, you'd think that we'd tax the robot at a similar level."
At first blush, taxing robots might sound like science fiction. But robots don't mind paying taxes. They don't feel pain at the thought that their hard-earned money is going to pay for government spending they might not support. They don't sweat late nights wrestling with W2s, quarterly estimates, or tax forms. And, at least as far as we know, no robot has ever opened a secret bank account or shell corporation in some sunny Caribbean tax haven.
Of course, robots can't really pay taxes. In practice, taxing Team Robot would mean taxing the businesses that own the robots and use them to replace human labor. It's really just a shift from taxing labor to taxing capital. Taxes could likely be calculated on a per-head basis, or an amount based on the revenue the robot helps produce, and be paid to wherever the robot lives.
Taxing robots can also help make up for the money government loses by not being able to tax the workers the robots replace. Right now, there are 3.5 million truck drivers hurtling down America's highways, along with 220,000 taxi drivers and 160,000 Uber drivers. The driverless car revolution is sure to replace some of those jobs. That will torpedo taxes and be a real windfall for businesses that no longer have to hire human workers. Taxing the robots can help restore the current balance.
If taxing robots works, there's no limit to where we can turn next. Taxing smartphones? Taxing video games? Taxing the Muppets? It's all fun and games until somebody tries to tax you. Good thing you've got us! We're here to give you the plan you need to pay less . . . so you can focus on important things like the robot takeover!
March 14th 2017
In Roman mythology, the hero Hercules used his divine strength to smash through the mountain that used to be Atlas. This created the Straits of Gibraltar, linked the Atlantic and the Mediterranean, and forged the famed Rock of Gibraltar. The so-called "rock" is an enormous limestone monolith, rising 1,398 feet nearly straight up from the sea, and making Gibraltar a key strategic crossroad....
In Roman mythology, the hero Hercules used his divine strength to smash through the mountain that used to be Atlas. This created the Straits of Gibraltar, linked the Atlantic and the Mediterranean, and forged the famed Rock of Gibraltar. The so-called "rock" is an enormous limestone monolith, rising 1,398 feet nearly straight up from the sea, and making Gibraltar a key strategic crossroad. It's also a natural paradise. It's home to over 500 species of plants, as well as the famed Barbary macaques, which are the only wild monkeys living in all of Europe.
Admiral George Rooke seized Gibraltar from Spain in 1704, and the Treaty of Utrecht ceded it to the British in 1713. But the treaty didn't specify a border, and the Spaniards are still bitter bumblebees about the whole thing. Local legend holds that when the monkeys leave, so will the British. Winston Churchill took that legend seriously enough that during World War II, when the population had dwindled to just seven, he issued an order to keep the population at no less than 24. (More about the monkeys in a bit.)
The territory today covers 2.6 square miles, including the Rock. That's barely a tenth the size of Manhattan. It's a bustling port and popular tourist destination. But there's little industry to speak of, and no agriculture at all. So how does a dinky little flyspeck of a state like that make a living? Well, there's new money coming in from online bookies and casinos. And like many territories clinging to the remnants of the British empire, it's become a tax shelter.
Gibraltar has no VAT tax. No sales tax. No wealth tax. No tax on interest, dividends, or capital gains. No gift or estate tax. Personal rates are capped at 26.25%. There's now a flat 10% tax on most corporations. Does that make for a true "tax haven"? Not necessarily — the government is proud to comply with OECD tax standards and our own Foreign Account Tax Compliance Act, which strong-arms foreign banks into identifying Americans with accounts topping $50,000. Gibraltar proudly calls itself a low-tax zone, and even sued a Spanish newspaper for calling it a "tax haven."
Still, the friendly tax regime has made Gibraltar home to 30,000 people and 30,000 corporations. That's quite a ratio! Data nerds will appreciate that Gibraltar has the second-highest number of "Big Four" accounting offices per capita (behind only the British Virgin Islands) and twelfth-highest number of banks. Conspiracy theorists will note that Mossack Fonseca, the law firm at the heart of last year's Panama Papers revelations, kept an office overlooking the harbor before closing it down in the wake of the story.
Gibraltar even has some natural tax collectors. We're talking about those macaques, who live in troops on the upper Rock. They share 99% of our DNA, which makes them curious and intelligent. And they have opposable thumbs, which makes them nimble and dextrous. They're more than happy to pickpocket "tax" visitors of food and even items like hats, sunglasses, earrings, and wigs. Watch out!
You might think after reading all this that your next move should be to someplace like Gibraltar. In fact, the nonprofit Tax Justice Network ranks our own United States as the number three tax haven in the world. The reality is that you don't need to move offshore to save money on taxes — you just need a proactive plan to make the most of legal opportunities here at home. So call us for that plan — we promise no monkeying around!
March 7th 2017
For generations, Americans fostered a culture of thrifty self-reliance, especially where it comes to taking care of our stuff. It started all the way back in pioneer days, and living on the frontier's edge. Back when Pa Ingalls lived in that little house in the big woods, if his saw broke, he couldn't just order up a replacement on Amazon. He had to fix it, or he would have a tough time...
Fixed This for You
For generations, Americans fostered a culture of thrifty self-reliance, especially where it comes to taking care of our stuff. It started all the way back in pioneer days, and living on the frontier's edge. Back when Pa Ingalls lived in that little house in the big woods, if his saw broke, he couldn't just order up a replacement on Amazon. He had to fix it, or he would have a tough time heating his house for the winter! Ma had one nice dress, for Sunday church, and when she got home she spent the rest of the day taking care of it. Folks mended and darned and repaired until household items had more lives than the family cat.
More recently, though, we've become a throwaway society. Maybe it's the flood of cheap, shoddy stuff from Walmart and China. Even formerly big-ticket purchases like TVs are cheap enough now that it rarely makes sense to repair them. (Think about it — your family room TV may have cost less than your phone.) Even real estate has become disposable, as thousands of Americans buy perfectly serviceable houses for the land they sit, then and tear them down to replace with something bigger (and usually gaudier and not as well built).
Our democratic socialist friends in the Kingdom of Sweden have noticed the same trend, and they're not very happy about it. (Yes, Sweden is still a monarchy — King Carl XVI Gustaf hands out the Nobel Prizes every year, and collects Porsche 911s.) It might seem ironic for the country that unleashed IKEA's particleboard aesthetic on the world to champion durability. But they've expressed it through their tax code, of all things, by passing a new law cutting taxes on fixing things.
Here's the scoop. Like most European countries, Sweden imposes a value-added tax, which is a form of sales tax levied at each level of production (such as from producer to distributor to retailer). In Sweden, the tax is 25% for most goods and services, 12% for restaurant meals and hotel stays, and 6% for printed materials, cultural events, and travel within the country. For 2014, the VAT raised 353 billion krona ($39 billion dollars, give or take a couple of meatballs), which amounts to 21% of the country's revenue.
Last November, the legislature chopped the VAT tax on repairs to items like bicycles, shoes, and clothing, from 25% to 12%. The goal is to encourage Swedes to buy higher-quality products. They also "Sweden the pot" by letting taxpayers deduct half the cost of repairs they make to appliances like refrigerators, ovens, and dishwashers. This makes repairs cheaper and helps keep repairmen employed in Sweden. (We suppose it could be possible to outsource refrigerator repairs to China or Mexico, but your food would probably melt before it gets back.)
Per Bolund, Sweden's Minister for Financial Markets, told BBC News, "I think it will be a good incentive and I think there's also a possibility that people will buy high-quality products and repair them, rather than buying cheap products they know will break down and then buy something new instead." He estimates the new law will cost Sweden about $250 million krona, not to mention slowing the growth of landfill fjords.
As long as we're on the topic of taxes and maintenance . . . how's your tax plan looking these days? Still shiny and new? Or showing some wear and tear at the seams? Tax planning isn't something you do just once and forget about. It's an ongoing process that needs periodic maintenance and tuning. So count on us to help keep your plan running in tip-top shape! (And if you don't already have a plan, what are you waiting for?)
February 22nd 2017
The people who work at the IRS can be proud to do an important job. They're the "accounts receivable" department for the federal government, and whether you think we need more government or less, we should collect the revenue to finance it as effectively as possible. Treasury Secretary Mnuchin has already stated that the incoming administration's ban on new government hiring shouldn't apply...
Survey Says . . . !
The people who work at the IRS can be proud to do an important job. They're the "accounts receivable" department for the federal government, and whether you think we need more government or less, we should collect the revenue to finance it as effectively as possible. Treasury Secretary Mnuchin has already stated that the incoming administration's ban on new government hiring shouldn't apply to the IRS — perhaps because he's seen the research showing every dollar invested in tax enforcement yields seven dollars in tax. (If you could spend one dollar to make seven, you might do it all day long!)
At the same time, IRS staffers understand the work they do isn't especially popular. As Louis XIV's Finance Minister Jean-Baptiste Colbert once said, "the art of taxation consists in so plucking the goose as to procure the largest quantity of feathers with the least possible amount of hissing." So you could say the IRS is similarly looking out for ways to boost the plucking while minimizing the hissing.
Towards that end, the IRS collections division has engaged the Pacific Consulting Group to send a "Customer Satisfaction Survey" (Form 13257-A, revised April, 2016) to a random group of taxpayers who have gone through the collections process. It included the usual collection of questions you would expect from a government survey, like rating how much you agree with statements like, "I received an adequate description of the collection process," and "I was treated with respect during the collection process." But we thought there were a few more questions that might have made sense — like these:
- "Did you feel violated when agents picked you up by the feet to shake the change out of your pockets?"
- "Did the Revenue Officer put the cushions back on the couch after searching for spare quarters that might have fallen between them?"
- "What would you have done with that money if you didn't have to pay your taxes?"
"If you could tell the government exactly how to spend your tax dollars, what would you tell them?"
- "Does the tax code make any more sense to you than it does to us?"
- "Be honest . . . you'd rather give the money to us than to the sales tax goons, amirite?"
- "When the robots finally take over, how do you think we should tax them?"
- "Pinch yourself. Does it hurt? If so, consult IRS Publication 502, Medical and Dental Expenses."
- "You seem nice . . . what are you doing next Thursday?"
- "What's your favorite BBQ joint? (Asking for a friend.)
Here's another question they should ask, but probably never will. "Do you have a plan in place to pay less tax so you don't get caught up in collections in the first place?" If not, call us, and see if we can silence some of the hissing!