Small Business and Taxes – Back to Biz Monday

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

One of the biggest hurdles you’ll face in running your own business is staying on top of your numerous obligations to federal, state, and local tax agencies. Tax codes seem to be in a constant state of flux making the Internal Revenue Code barely understandable to most people.

The old legal saying that “ignorance of the law is no excuse” is perhaps most often applied in tax settings and it is safe to assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” claim. On the flip side, it is surprising how many small businesses actually overpay their taxes, neglecting to take deductions they’re legally entitled to that can help them lower their tax bill.

Preparing your taxes and strategizing as to how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, money, and an auditor knocking on your door, is to have a professional accountant handle your taxes.

Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code.

When it comes to tax planning for small businesses, the complexity of tax law generates a lot of folklore and misinformation that also leads to costly mistakes. With that in mind, here is a look at some of the more common small business tax misperceptions.

1. All Start-Up Costs Are Immediately Deductible

Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start up and organizational costs are generally called capital expenditures.

Costs for a particular asset (such as machinery or office equipment) are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.

For tax years beginning in 2010, you can elect to deduct up to $10,000 of business start-up costs paid or incurred after 2009. The $10,000 deduction is reduced (but not below zero) by the amount such start-up costs exceed $60,000. Any remaining costs must be amortized.

2. Overpaying The IRS Makes You “Audit Proof”

The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. Being incorporated enables you to take more deductions.

Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or move the company in a different direction. In addition, plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

4. The home office deduction is a red flag for an audit.

While it used to be a red flag, this is no longer true–as long as you keep excellent records that satisfy IRS requirements. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio however, may raise a red flag and lead to an audit.

5. If you don’t take the home office deduction, business expenses are not deductible.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

6. Requesting an extension on your taxes is an extension to pay taxes.

Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.

7. Part-time business owners cannot set up self-employed pensions.

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records and understanding how the tax system works is beneficial to any business owner, whether you run a small to medium sized business or are a sole proprietor.

And, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If you have any questions, don’t hesitate to give us a call today. We’re here to assist you.

~Larry Stone

Larry D. Stone,  Stone CPA

970.668.0772,    970.668.0434,

larry@stone-cpa.com – Colorado Tax Coach

Author of “The Secrets of a Tax Free Life”

Hobby vs. Business – Colorado Tax Coach

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

Millions of Americans have hobbies such as photography, sewing, woodworking, fishing, gardening, stamp and coin collecting, but when that hobby starts to turn a profit, it might just be considered a business by the IRS.

Definition of a Hobby vs a Business

The IRS defines a hobby as an activity that is not pursued for profit. A business, on the other hand, is an activity that is carried out with the reasonable expectation of earning a profit.

The tax considerations are different for each activity so it’s important for taxpayers to determine whether an activity is engaged in for profit as a business or is just a hobby for personal enjoyment.

Of course, you must report and pay tax on income from almost all sources, including hobbies. But when it comes to deductions such as expenses and losses, the two activities differ in their tax implications.

Is Your Hobby Actually a Business?

If you’re not sure whether you’re running a business or simply enjoying a hobby, here are some of the factors you should consider:

• Does the time and effort put into the activity indicate an intention to make a profit?

• Do you depend on income from the activity?

• If there are losses, are they due to circumstances beyond your control or did they occur in the start-up phase of the business?

• Have you changed methods of operation to improve profitability?

• Do you have the knowledge needed to carry on the activity as a successful business?

• Have you made a profit in similar activities in the past?

• Does the activity make a profit in some years?

• Do you expect to make a profit in the future from the appreciation of assets used in the activity?

An activity is presumed to be for profit if it makes a profit in at least three of the last five tax years, including the current year (or at least two of the last seven years for activities that consist primarily of breeding, showing, training, or racing horses).

The IRS says that it looks at all facts when determining whether a hobby is for pleasure or business, but the profit test is the primary one. If the activity earned income in three out of the last five years, it is for profit. If the activity does not meet the profit test, the IRS will take an individualized look at the facts of your activity using the list of questions above to determine whether it’s a business or a hobby. (It should be noted that this list is not all-inclusive.)

Business Activity: If the activity is determined to be a business, you can deduct ordinary and necessary expenses for the operation of the business on a Schedule C or C-EZ on your Form 1040 without considerations for percentage limitations. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is appropriate for your business.

Hobby: If an activity is a hobby, not for profit, losses from that activity may not be used to offset other income. You can only deduct expenses up to the amount of income earned from the hobby. These expenses, with other miscellaneous expenses, are itemized on Schedule A and must also meet the 2 percent limitation of your adjusted gross income in order to be deducted.

What Are Allowable Hobby Deductions?

If your activity is not carried on for profit, allowable deductions cannot exceed the gross receipts for the activity.

Note: Internal Revenue Code Section 183 (Activities Not Engaged in for Profit) limits deductions that can be claimed when an activity is not engaged in for profit. IRC 183 is sometimes referred to as the “hobby loss rule.”

Deductions for hobby activities are claimed as itemized deductions on Schedule A, Form 1040. These deductions must be taken in the following order and only to the extent stated in each of three categories:

• Deductions that a taxpayer may claim for certain personal expenses, such as home mortgage interest and taxes, may be taken in full.

• Deductions that don’t result in an adjustment to the basis of property, such as advertising, insurance premiums, and wages, may be taken next, to the extent gross income for the activity is more than the deductions from the first category.

• Deductions that reduce the basis of property, such as depreciation and amortization, are taken last, but only to the extent gross income for the activity is more than the deductions taken in the first two categories.

If your hobby is regularly generating income, it could make tax sense for you to consider it a business because you might be able to lower your taxes and take certain deductions.

Give us a call if you’re not sure whether your hobby is actually a business and we’ll help you figure it out.

Larry D. Stone,  Stone CPA

970.668.0772,  970.668.0434,  888.668.0772

larry@stone-cpa.com – Colorado Tax Coach

Back to Biz Monday – Green Apple

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

Apple has blazed a reputation for stylish design and innovative products for the past 20 years, creating a near-cult following among fans. Artists and designers who set so many of today’s trends have been attracted to the appeal of apple’s computers. Their iPod has helped change how the world listens to music. Their iPad has made online content available nearly anywhere. And their iPhone is helping change the way we communicate with friends, family, and colleagues. (Just a few years ago, your mother-in-law didn’t have a cell phone. Now she sends text messages and “checks in” on Facebook.)

Apple may be the most successful company on earth. At one point last year, they had more cash on hand ($76.2 billion) than the United States government ($73.8 billion). And Apple is currently the most valuable company on the planet, with a “market cap” (total value of tradeable shares) that topped $590 billion dollars on April 10. (That’s right . . . those iTunes you casually download for a buck each have created a company worth over half a trillion dollars.) In fact, Apple’s current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand — combined.

But Apple’s most recent annual report reveals the company’s genius for creating successful marketing strategies also extends to successful tax strategies. How else would you describe a strategy that lets Apple earn billions and pays less than 10% of their taxable income in tax?

How do they do it? Largely by keeping the money they earn outside the United States, outside the United States. Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the “Double Irish with a Dutch Sandwich” strategy that hundreds of other multinational companies have imitated. Apple even maintains a subsidiary in tax-free Nevada — the blandly-named “Braeburn Capital” — to manage that enormous cash haul without paying tax in its home state of California. For 2011, the company paid a worldwide tax of $3.3 billion on $34.2 billion of profit. But one study concludes that Apple would have paid $2.4 billion more without these rules.

Now Apple has become part of the political debate. At the risk of grossly oversimplifying a pretty complicated discussion, Democrats in Washington scoff that taking an extra $2.4 billion in tax last year would have squelched Apple’s creativity. Republicans reply that using the cash to grow the business or distribute more dividends to shareholders will grow the economy faster than if it goes to the IRS. Both President Obama and presumed Republican nominee Mitt Romney have called for eliminating corporate tax loopholes in order to pay for lower rates (28% in President Obama’s plan, 25% in Governor Romney’s). Either way, Apple is likely to become one of the stories — like Warren Buffett paying a higher tax rate than his secretary — that come to define this year’s campaign.

Taxes always play a part in Presidential races. But this time, with the economy still struggling and the Bush tax cuts scheduled to expire in a few short months, taxes will be even more important than usual. Our job, as November approaches, includes helping you understand just what the candidates’ proposals mean for your bottom line. So keep up with these emails — and if you’re curious how any of the proposals you hear about would affect your plan, call us!

~Larry

Larry D. Stone,  Stone CPA

970.668.0772,  970.668.0434,  888.668.0772

larry@stone-cpa.com – Colorado Tax Coach, Author of “The Secrets of a Tax Free Life”

Play Ball! – Back to Biz Monday

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

The 2013 baseball season is barely a month old, and fans are already bickering over the first twists and turns. That’s because rabid fans are never content to just watcha game. They have to discuss it — among friends, at the local tavern, and on talk radio. If a pop fly drops for a single behind Cubs center fielder David DeJesus, and no one is there to argue he should have caught it, does it really make any noise?

Statisticians have always delighted in analyzing baseball — some would say, analyzing it to death. So-called “sabermetricians” (followers of the Society of American Baseball Research, or SABR) pore over arcane stats like “batting average on balls in play” (a measure of how many balls in play against a pitcher go for hits, excluding home runs, used to spot fluky seasons) or “value over replacement player” (a measure of how much a player contributes to their team in comparison to a fictitious replacement player who is an average fielder at his position but below-average hitter).

Now there’s a whole new category of relevant statistics for fans to debate. The Journal of Sports Managementhas just accepted a paper from Fordham University business professor Stanley Veliotis, titled Salary Equalization for Baseball Free Agents Confronting Different State Tax Regimes. And this one will blow the lid right off Moneyball! Here’s the abstract:

“This paper derives equivalent gross salary for Major League Baseball free agents weighing offers from teams based in states with different income tax rates. After discussing tax law applicable to professional sports teams’ players, including ‘jock taxes’ and the interrelationship of state and federal taxes, this paper builds several models to determine equivalent salary. A base-case derivation, oversimplified by ignoring non-salary income and Medicare tax, demonstrates that salary adjustment from a more tax expensive state’s team requires solely a state (but not federal) tax gross-up. Subsequent derivations, introducing non-salary income and Medicare tax, demonstrate full Medicare but small federal tax gross-ups are also required. This paper applies the model to equalize salary offers from two teams in different states in a highly stylized example approximating the 2010 free agency of pitcher Cliff Lee. Aspects of the models may also be used to inform other sports’ players of their after-tax income if salary caps limit the ability to receive adequately grossed-up salaries.”

Aren’t you glad you’ve got us to make sense of this stuff? (And this is baseball — it’s supposed to be fun.)

Taxes have always dogged professional athletes. What basketball fan hasn’t wondered what role Florida’s sunny tax-free climate played in luring superstar LeBron James to the Miami Heat? And really, who can blame golfing great Phil Mickelson for threatening to abandon California to escape a 63% tax rate?

But just imagine the debates this paper will inspire! How will interleague play affect equivalent gross salaries for NL East teams playing even more games in tax-heavy New York? Does A-Rod really come out ahead by sticking with the Yankees? Will fists fly when Canadians realize none of this has any meaning for the lowly Toronto Blue Jays?

You may think the tax code is harder to understand than the infield fly rule. (You may even be right.) But there’s one very important difference between baseball and taxes. Stats geeks can use measures like the “player empirical comparison and test algorithm” to guess how players might perform for the rest of the season. But proactive tax planners like us can use proven strategies like the medical expense reimbursement plan, S-corporation, or home office deduction to guarantee less tax. So call us when you’re ready to measure some savings that count!

~Larry Stone

Larry D. Stone,  Stone CPA

970.668.0772,    970.668.0434,

larry@stone-cpa.com – Colorado Tax Coach

Author of “The Secrets of a Tax Free Life”

“Like” This

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

America’s economy continues to sputter. But stocks are picking up steam and flirting with four-year highs. We’re even seeing new “dot-coms” hitting the market. Last May, the social networking site LinkedIn went public at $45 per share, then leaped to $94.25 in its first day of trading. Internet coupon vendor Groupon opened in November at $20 per share, then jumped 31% on its first day of trading. And earlier this month, Facebook filed registration papers with the Securities and Exchange Commission for what may be the hottest IPO since Google.

Companies typically go public to raise money to expand. But Facebook doesn’t really need cash from an IPO. The company made nearly $4 billion in advertising revenue in 2011. So why go public?

Well, companies also go public to let founders and early investors cash out. Mark Zuckerberg, Facebook’s 27-year-old founder, is already a “paper” billionaire, ranked #14 on the Forbes 400 list of richest Americans. (Not many entrepreneurs find themselves richer than Scrooge McDuck while still at an age that they watch Scrooge McDuck.) But Facebook’s IPO will give Zuckerberg and fellow early investors liquidity, converting paper wealth into cash for the houses, charitable gifts, and other spending that new dot-com millionaires historically indulge in.

The IPO will also stick Zuckerberg with a historically large tax bill. (You knew that was coming, right?) In fact, one of the big reasons the company is going public in the first place is to give Zuckerberg a way to pay taxes when he exercises options to buy even more stock.

Here’s how it works. For tax purposes, the value of most stock options is treated as compensation and fixed the day you exercise them — whether you actually sell them or not. Let’s say you pay $5 to exercise a share of your employer’s stock, on a day when that stock is worth $25. Your company gets a deduction for that $20 per share, even though there’s no cash outlay. That’s great for the company. But at the same time, you’ll owe immediate tax on $20 of income, even if you hold the stock in hope of future appreciation. (If the stock tanks before you actually sell, you still owe tax on that gain.) That may not be so great for you!

Zuckerberg currently owns 414 million shares of Facebook. He also has options to buy another 120 million shares for — get this — just six cents each. Zuckerberg has announced plans to exercise those options and sell enough shares to cover his taxes. We don’t know yet what Facebook shares will trade for. However, private-market trades have valued shares at $40 each. If Zuckerberg exercises all 120 million options when shares are valued at that price, his taxable gain will be nearly $5 billion. He’ll owe 35% to the IRS, plus 10.3% to the state of California, for a total tax bill of over $2 billion. That’s right, billion with a “b.” Can you imagine signing a return with a billion-dollar tax bill? How about signing a check for that much — payable to the IRS!

The important thing to realize here is that Zuckerberg’s tax bill came as no surprise. It’s actually the result of careful planning. Remember, Zuckerberg’s pain is Facebook’s gain. The strategy will probably give Facebook enough deductions to wipe out the entire tax on its 2011 profit, plus refunds from 2009 and 2010, plus even more to carry forward.

Think about that the next time you click the “Like” button on your computer. And remember, we’re here to bring the same sort of smart tax planning to your business.

~Larry

Larry D. Stone,  Stone CPA

970.668.0772,  970.668.0434,  888.668.0772

larry@stone-cpa.com – Colorado Tax Coach

Author of “The Secrets of a Tax Free Life”

Jedi Tax Planning – Back to Biz Monday

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

Filmmaker George Lucas has been a Hollywood success since 1973, when he spent just $775,000 to produce American Graffiti — then watched it go on to gross over $200 million. Lucas has influenced a generation of filmmakers and films, as director (19 titles), producer (67 titles), writer (81 titles), and even an actor (he played an uncredited “Alien on TV Monitor” in the first Men in Black). Of course, he’ll always be best known as creator of the Star Wars series, which popularized the “space opera” genre for a galaxy of fans.

Last month, Lucas announced that he’s selling his production company, Lucasfilms, to The Walt Disney Company for $4.05 billion in cash and stock. And it should hardly come as a surprise ending that he found a way to beat the IRS that’s almost as powerful as launching a proton torpedo down the Death Star’s exhaust port.

How did he do it? Elaborate special effects? Computer-generated imaging? Nope. He did it just by selling now, in 2012.

We have no idea how the evil Empire collected taxes a long time ago, in a galaxy far, far away. (We suspect that R2D2 kept awesome records in case he was audited; Darth Vader hid his money on Endor, a forest moon bearing a striking resemblance to the Cayman Islands; and Chewbacca never bothered to file at all.) But here in the U.S., gains from the sale of a business are treated as capital gains and subject to tax up to 15%. Lucas is taking half of his proceeds in Disney stock, so that part escapes tax for now. (He’ll pay if he sells those Disney shares sometime down the road.) But that still leaves up to $2 billion in fully taxable cash gains. And that means up to $300 million in tax for Uncle Sam.

At least, that’s how it works this year. On January 1, the Empire strikes back, when those Bush-era rates expire. Unless Washington gives us a new hope, that capital gains rate jumps to 20%. President Obama has said he wants to extend the current rates for income under $200,000 ($250,000 for joint filers), and the Senate has passed a bill to do just that. But if the 20% Clinton capital gains rate returns, at least for guys in Lucas’s bracket, selling in 2013 could have cost him up to $100 million more in immediate tax. That’s at least enough to recondition a Millenium Falcon or two!

January 1 also marks the start of a new phantom menace, the “Unearned Income Medicare Contribution,” on investment income, including capital gains, for those earning above that same $200,000 threshold. The new Medicare tax is “just” 3.8% — but 3.8% of $2 billion is still a hefty $76 million.

The sale also represents smart estate planning for Lucas, who is 68. While generations of fans hope to see him shepherd the final three Star Wars films to the theatre, the sale will spare his heirs the challenge of managing his affairs at his death. Lucas has already announced plans to donate the bulk of his estate to educational charities, and the gifts he’s already made, including $175 million to his alma mater University of Southern California, will surely ease the tax bite on that transfer.

Selling a business is one of the toughest productions any entrepreneur directs. Making the most of that opportunity takes bits of Luke Skywalker’s drive, Han Solo’s skill, and Obi-Wan Kenobi’s wisdom. And keeping the most of your proceeds takes the right tax advice. That’s why we’re here — to give you a plan to keep the most of your legacy. And remember, we’re here for your family, friends, and colleagues, too. May the Force be with you!

~Larry

Larry D. Stone,  Stone CPA

970.668.0772,   970.668.0434,   888.668.0772

larry@stone-cpa.com – Colorado Tax Coach

Author of “The Secrets of a Tax Free Life”

Relief for “Superstorm” Sandy – Back to Biz Monday says Donate!

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

Hurricane Sandy roared ashore over a week ago, interrupting lives and yes the election. We’ll be addressing the election results next week, especially as we get more guidance on what to expect for your taxes. We are impressed, as always, with how a natural disaster brings out the best in Americans, and we’re pleased to see both Democrats and Republicans joining together to help those most affected by the storm. There are still many who need assistance on the East Coast!

The IRS gives generous tax deductions to help make our own generous charitable gifts go further. So this week we’re writing to help you make the most of efforts you might make to support storm victims — or any other year-end charitable gifts.

• You can deduct up to 50% of your adjusted gross income for cash gifts you make to so-called “501(c)(3) organizations,” or public charities working on behalf of storm victims. These include the American Red Cross and similarly recognizeable groups.

• If you give more than $250 in any single gift, you’ll need a written receipt from the recipient, dated no later than the filing date of your return.

• Gifts of food, clothing, furniture, electronics, or household items are deductible at “fair-market value,” such as the price you would get for them at a resale shop. Consider using software, available at any office-supply store, for tracking your gifts and their value. You might be surprised at how much you can save!

• Gifts of cars, trucks, and boats are a little trickier. Congress has cracked down on inflated car and truck deductions. If you donate a vehicle, you can deduct the fair-market value only if the charity actually uses it (such as a church using a van to drive its parishioners). If the charity sells the vehicle, your deduction is limted to the amount the charity actually realizes on the sale. And if that amount is more than $500, you’ll have to attach a certification to your return that states the vehicle was sold in an arms-length sale and includes the gross proceeds from that sale.

• Donations you make by text message are deductible like any other cash gifts. You can use your phone bill to substantiate your deduction.

The IRS cautions us all to seek out qualified charities, and warns that bogus requests for charities that simply don’t exist are common after natural disasters. The IRS also announced that they would give businesses and tax preparers affected by the hurricane an extra seven days to file payroll and excise tax returns that were due on October 31.

December 31 is approaching faster than you’d like, and that means time is running out for year-end tax planning. But it’s not too late to take concrete steps to cut your 2012 taxes. What are your year-end financial goals? Helping the victims of the storm? Saving for your dream retirement? Helping finance your children’s or grandchildren’s education? Odds are good that we can help you save taxes while you do it. And remember, we’re here for your family, friends, and colleagues too! Start Here:

Donate to the Red Cross: http://www.redcross.org/charitable-donations

~Larry

Larry D. Stone,  Stone CPA

970.668.0772,   970.668.0434,   888.668.0772

larry@stone-cpa.com – Colorado Tax Coach, Author of “The Secrets of a Tax Free Life”

Photo Credit: Nancy Augustine

‘Mastering’ Tax Breaks

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

This weekend’s Masters golf tournament featured the usual perfect weather, gorgeous scenery, and competitive play that fans have loved for so long. Tiger Woods came into the tournament as the betting favorite based on his win at last month’s Arnold Palmer Invitational — his first tour victory in nearly three years. But Tiger’s performance disappointed his fans yet again — in fact, he even hit a spectator on that Saturday. And in the end, Bubba Watson became only the third leftie in history to don the coveted green jacket.

It turns out Tiger isn’t the only one having trouble on the course. Our good friends at the IRS have also “sliced into the rough” over the question of deducting conservation easements for golf courses. A “conservation easement” is a gift of a partial interest in real estate you make to a publicly-supported charity or government. If you own a historic townhouse, for example, you might donate the right to make changes to the facade, to ensure it keeps its historic character. If you own a farm at the edge of the city, you might donate development rights, to ensure it remains green space. You’ll need an appraisal to support the value of your gift, as the IRS is cracking down on inflated conservation easement deductions. If your gift exceeds 50% of that year’s adjusted gross income, you can carry forward the excess for up to 15 years (rather than the usual five year limit for all other charitable gifts).

The easement in question involves Kiva Dunes — a Jerry Pate-designed golf course nestled on Alabama’s Fort Morgan Peninsula, which is tucked neatly between Mobile Bay and the Gulf of Mexico. The course is surrounded by 163 upscale homes, including 30 right on the beach. It’s no Augusta National, of course, although Golf Digest has ranked it the best course in Alabama. Back in 2002, the partnership that owns Kiva Dunes placed a conservation easement on the course, limiting its use to a golf course, park, or farm. They appraised the easement at $30.6 million, donated it to the North American Land Trust, and happily deducted that amount on their partnership return. (Not bad, considering the owners paid just $1.05 million for the property encompassing both the course and the homesites back in 1992!)

Not surprisingly, the IRS ruled the deduction out of bounds — valuing the easement at just $10.0 million — and the case wound up in Tax Court. The Court started by noting that the partnership’s appraiser lives and works in the immediate vicinity of the course and has decades of experience evaluating local properties, while the IRS’s appraiser lives 250 miles away in Birmingham and has only visited the vicinity of the course twice. Then they estimated how much the owners could realize if they subdivided the property for the same sort of instant mansions already surrounding the course ($31.9 million). Next, they calculated the current value of the golf course (just shy of $3.0 million). Finally, they subtracted the current value from the potential value to settle on a $28.7 million value for the easement — really, just a chip shot away from the partnership’s original appraisal.

The law allowing deductions for conservation easements expired at the end of 2011. That’s not necessarily the end of the story, though — lots of popular tax breaks expire, then come back from the dead. But this one may be more dead than usual. That’s because President Obama’s 2013 budget proposes to eliminate deductions for golf course conservation easements entirely, arguing that they do more to benefit the people living in the McMansions surrounding the courses than the general public. Thus, Kiva Dunes’s owners may be the last to benefit from this hole-in-one of a deduction.

Minimizing your taxes may look hard, but it’s a lot easier than driving straight down the fairway. Proactive planning is the key to staying out of the sand and water. Remember, we’re here for you — and the rest of your foursome, too!

~Larry

Larry D. Stone,  Stone CPA

970.668.0772,  970.668.0434,  888.668.0772

larry@stone-cpa.com – Colorado Tax Coach, Author of “The Secrets of a Tax Free Life”

Advantages of Keeping Good Records – Biz Monday

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

You can avoid headaches at tax time by keeping track of your receipts and other records throughout the year. Good record-keeping will help you remember the various transactions you made during the year, which in turn may make filing your return less, well, taxing.

Records help you document the deductions you’ve claimed on your return. You’ll need this documentation should the IRS select your return for examination. Normally, tax records should be kept for three years, but some documents – such as records relating to a home purchase or sale, stock transactions, IRA, and business or rental property – should be kept longer.

In most cases, the IRS does not require you to keep records in any special manner. Generally speaking, however, you should keep any and all documents that may have an impact on your federal tax return:

• Bills

• Credit card and other receipts

• Invoices

• Mileage logs

• Canceled, imaged, or substitute checks or any other proof of payment

• Any other records to support deductions or credits you claim on your return

Good record-keeping throughout the year saves you time and effort at tax time. For more information on what kinds of records you should keep, call our office.

~Larry

Larry D. Stone,  Stone CPA

970.668.0772,  970.668.0434,  888.668.0772

larry@stone-cpa.com – Colorado Tax Coach

Employee Relocation in Todays Market

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

Autumn is often the time you find folks relocating. Many companies have questions about what to do with an employee’s home when he or she is moved to a new job location, especially with the real estate market is in a downturn throughout much of the country.

Typically, the employer wants to protect the employee against financial loss on a “forced” sale of the home. Here are the most common ways to do that, and their consequences to the employee:

The employer reimburses the employee’s financial loss. Here the employer has the home appraised and agrees to pay the employee the difference between the appraised fair market value and any lesser amount the employee gets on the sale. Such reimbursement would cover the employee’s costs of the sale.

Note: The financial loss here is not the same as a tax loss. The financial loss is the home’s value less what the employee collects under “forced sale” conditions. In the current real estate market, the value is not always clearly determined. The relocating employee might think the home is worth more, based on earlier appraisals or comparative sales. A tax loss is the property’s tax basis (cost plus capital investments) less what’s collected on the sale.

If the employee has a gain on the sale (the amount collected on the sale exceeds the basis), gain can be tax-exempt up to $250,000 ($500,000 on certain husband-wife sales). However, tax loss on the sale of one’s residence is not deductible.

The employer’s reimbursement of the employee’s financial loss is taxable pay to the employee. Employers who want to shelter the employee from any tax burden on what is usually an employer-instigated relocation may “gross-up” the reimbursement to cover the tax. But gross-up can be costly. For example, a grossed-up income tax reimbursement for a $10,000 loss would be $15,385 for an employee in the 35% bracket – more where Social Security taxes or state taxes are also grossed-up.

Employer buys the home. Few employers directly buy and sell employees’ homes. But many do this indirectly, effectively becoming the homes’ owners, through use of relocation firms acting as the employers’ agents. An IRS ruling shows how to do this with no tax on the employee:

Option 1. The relocation firm as employer’s agent buys the home for its appraised fair market value, and later resells it. The firm collects a fee from the employer, which will cover sales costs and any financial loss to the firm on resale. The IRS now says that this fee is not taxable to the employee. Also, the employee’s gain on the sale to the relocation firm qualifies for the tax exemption under the limits described above ($250,000 or $500,000).

Option 2. The relocation firm offers to buy the home for its appraised value, but the employee can choose to pursue a higher price through a broker he or she chooses from a list provided by the relocation firm. If a higher offer is made, the relocation firm pays that price to the employee (whether or not the home is then sold to that bidder). Here again, the employee is not taxed on the firm’s fee and the gain is tax exempt under the above limits.

Tip: Either option works for the employee, letting him or her realize full value on the sale of the home (with possibly greater value through Option 2), without an element of taxable pay.

Caution: If the deal is structured so that the relocation firm facilitates a sale from the employee to a third-party buyer (rather than to the relocation firm), the employer’s payment of the relocation firm’s fee is taxable to the employee.

The Employer’s Side

Reimbursing the employee’s loss. This is fully deductible as a business expense, as would be any additional amount paid as a gross-up.

Note: It’s fully deductible, but it may be more costly, before and after taxes, than buying the home for resale through the relocation firm.

Note: Paying the relocation fee only, without buying the home, as in the “Caution” above, is also fully deductible, as would be any gross-up amount on that fee.

Buying the home. The change in the IRS rule was good news for employees, but it gave nothing to employers, whose tax treatment wasn’t covered. The official IRS position is that employer costs (other than carrying costs such as mortgage interest, maintenance, and fees to a relocation management company) are deductible only as capital losses, which, for corporate employers, are deductible only against capital gains. Taxpayer advocates tend to argue that employer costs here are fully deductible ordinary costs of doing business.

Questions?

Are you an employee who is being relocated this fall? Are you wondering about the sale of your home and the tax implications for you? We can answer your questions. Just give us a call.

Larry D. Stone,  Stone CPA

970.668.0772,  970.668.0434,  888.668.0772

larry@stone-cpa.com – Colorado Tax Coach

Getting an Accurate Business Valuation – 3 Tips for Business Monday

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

If you’re conscientious about financial reporting, you may already have a sense of your company’s worth, but in some instances you might need a formal business valuation, such as:

• For certain transactions. Selling your business? Planning an IPO? Need financing?

• For tax purposes. Includes estate planning, stock option distribution, and S Corporation conversions.

• For litigation. Needed in cases like bankruptcy, divorce, and damage determinations.

There isn’t a single formula for valuing a business, but there are generally-accepted measures that will give you a valid assessment of your company’s worth. Here are some tips that will help you get a more accurate business valuation.

1. Take a close look at how your business operates. Does it incorporate the most tax-efficient structure? Have sales been lagging or are you selling most of your merchandise to only a few customers? If so, then consider jump-starting your sales effort by bringing in a seasoned consultant.Do you have several products that are not selling well? Maybe it’s time to remove them from your inventory. Redesign your catalog to give it a fresh new look and make a point of discussing any new and exciting product lines with your existing customer base.It might also be time to give your physical properties a spring cleaning. Even minor upgrades such as a new coat of paint will increase your business valuation.

2. Keep in mind that business valuation is not just an exercise in numbers where you subtract your liabilities from your assets, it’s also based on the value of your intangible assets.It’s easy to figure out the numbers for the value of your real estate and fixtures, but what is your intellectual property worth? Do you hold any patents or trademarks? And what about your business relationships or the reputation you’ve established with existing clients and in the community? Don’t forget about key long-term employees whose in-depth knowledge about your business also adds value to its net worth.

3. Choose your appraisal team carefully. Don’t try to do it yourself by turning to the Internet or reading a few books. You may eventually need to bring in experts like a business broker and an attorney, but your first step should be to contact us. We have the expertise you need to arrive a fair valuation of your business.If you need a business valuation for whatever reason, give us a call today.

Stream of Tax-iousness

If you're like most Americans, coronavirus quarantines and "social distancing" mean you're going to spend a lot of time in front of your TV binging on Netflix, HBO, Amazon Prime, and Disney+;. If you're working from home, you'll spend more time listening to your favorite music on Pandora or Spotify. And believe it or not, even your lockdown entertainment choices have tax consequences.

Twenty years ago, your entertainment choice was easy. You paid way too much money for a bundle of cable or satellite TV stations, most of which you never watched. It seemed like every government in the world reached their hand out to hide a tax in that bill. Comcast's web site lists nine different government-mandated taxes and fees they collect: 911 fees, sales tax, state communications tax, gross receipts tax, and something mysteriously labeled the Federal Universal Services Fund. (Seriously, is there anything Uncle Sam does that can't be described as "Universal Services"?)

Over time, though, subscribers grew disenchanted with those bloated packages. Remember Bruce Springsteen's cynical 1992 hit, 57 Channels and Nothing On? Yeah, that. So we started cutting the cord, replacing pricey bundled cable service with a la carte streaming video subscriptions. By one estimate, 50 million Americans have dropped cable or satellite TV. That didn't just cost the TV providers — it cost the governments taxing them.

Around the same time, streaming music services let us listen to our favorite artists without venturing out to Target or the record store to bring home (taxble) CDs or vinyl. (For those of you under age 30, a "record store" was a place where . . . oh, never mind.) Apple and Amazon rolled out Kindle books and audiobooks.

Fast forward to 2020. Netflix reports its subscribers watch over 140 million hours of video per day, and that's about to go way up. 250 million people use Spotify, and that's just 40% of the streaming music market. Amazon sells more Kindle books than real books, and 82% of American households have Prime memberships. That's more Americans than attend church, own guns, or even vote.

So, within the past few years, 22 states have extended sales taxes to all those streaming services. And with coronavirus braking the economy to a screeching halt, you can bet the rest will be looking to do it, too. As Connecticut Governor Ned Lamont said last year, "Our current sales tax is designed for a Sears Roebuck economy driven by over-the-counter sales. Today we live in an Amazon economy, which is driven by e-commerce, digital downloads and consumer services."

The best part about these taxes, at least as far as the states are concerned, is that they're so tiny. Let's say you're paying $15.99 for Netflix's priciest package. A 6% sales tax adds just 99¢ to your monthly bill — the tax man's equivalent of hiding broccoli in your toddler's cheesy quesadilla. That's hardly worth complaining about — so nobody does. But add up all your subscriptions, and multiply it by the millions of taxpayers watching the same Office and Friends reruns, and pretty soon you're talking real money.

Sales taxes on streaming services certainly won't replace all the taxes that state and local governments lose on cable TV and physical books, DVDs, and music. That means you can still expect them to reach for more. We'll be on the alert for ways we can help you pay less on whatever alternatives they roll out. The current crisis may make planning harder, but it remains just as important as ever!

Great Moments in Tax Litigation

Some of the greatest stories in America reach their dramatic finale in a courtroom. Who doesn't admire Gregory Peck as Atticus Finch standing up to racism in Jim Crow-era Alabama in To Kill A Mockingbird? Who can forget Tom Cruise baiting Jack Nicholson into bellowing out that yes, he did order the Code Red at the end of A Few Good Men? And who can't imagine the smile of relief on O.J. Simpson's face when the jury announced they had found him not guilty? (Good thing he's finally out of jail so he can pick up his search for the real killers!)

Funny thing about those stirring courtroom dramas, though . . . they never involve tax cases. Don't novelists see the conflict inherent in a "battle of the appraisers" debating golf course valuations in a conservation easement case? Can't Hollywood producers tease out the complex dramas underlying a typical multinational transfer pricing dispute? What playwright wouldn't dream of meditating on the cross-salient tankgrenuities raised by "Section 393 transfers" between counter-impactful entities after a Section 754 election? (Relax, we made that last one up. Those aren't even real words.)

But tax questions do occasionally sneak into an actual court. So join us now for this week's story, which begins on the banks of the Ohio River.

Back in 1850, Cincinnati was the sixth-largest city in America, nicknamed "Porkopolis" for the area's meatpacking industry. (Can you imagine the smell?) Today, Cincinnati, along with rivertown rivals like Pittsburgh, St. Louis, and Kansas City, is navigating the transition to a 21st-century economy. But only Cincinnati is the home of professional baseball. And while today's Cincinnati Reds may be a pale shadow of the 1970s "Big Red Machine," fans still flock to the riverfront Great American Ballpark on game day — especially when the team gives away player bobblehead dolls.

That, in turn, brings us to the Titanic struggle that just reached its ninth inning in Ohio Supreme Court: do the Reds have to pay use tax on the value of those bobbleheads? The state tax commissioner argued the team had bought them to give away to fans, in which case the team owed the tax. The Reds responded that they had bought them to resell as part of the overall ticket, in which case they would qualify for the "sale-for-resale" exemption under ORC §5739.01(E). The Board of Tax Appeals called the Reds "out," and demanded $80,000 in back tax.

Naturally, the team challenged the ruling on the field. That's when the replay reviewers at the Court stepped in. Last month, they issued their call. By a 5-2 count, the Justices yanked the commissioner from the mound. Instead, as Chief Justice Fisher wrote, "the unique promotional items were an explicit part of the bargain, along with the right to attend the game, that the fans obtained in exchange for paying the ticket fee." That promise qualified the play as a resale. In the words of longtime radio announcer Marty Brennaman, "This one belongs to the Reds!"

We've said before that every financial choice you make has some tax consequence. This week's story proves that can be true even when you're not making a choice! And while nobody is getting rich by eliminating bobblehead taxes from their life, the lesson remains that proactive planning is the key to paying less. So enjoy the rest of 2018 and have a Happy New Year. And count on us to help you make the most of all your planning opportunities in 2019 and beyond!

Holiday Tax Advice From Epidemiologists

Holiday season is in full swing, and millions of Americans are celebrating with their favorite libations. Breweries are rolling out their winter brews. Wine stores are stocking up on champagne. And somewhere in a gentrifying warehouse district near you, a hipster bartender in a flannel shirt and man bun is crafting his favorite seasonal cocktail.

But alcohol can be a mixed blessing. Alcoholism is a disease; public intoxication is a crime; and drunk driving is epidemic. If a plucky Silicon Valley startup invented a new product called "Booz" or "Hüch," the Food and Drug Administration would surely shoot it down.

So, could taxes play a role in helping Americans drink more responsibly? Last week, Vox analyzed the issue from a public health perspective, and came to some pretty sobering conclusions. (No lawyers and lobbyists spinning loopholes here!)

First, some perspective. Uncle Sam collected about $9.7 billion in alcohol taxes in 2017. These generally run $16 per barrel of beer (with a special rate for your friendly neighborhood brewpub), $1.07-3.40 per gallon of wine, and $13.50 per "proof gallon" of hard liquor. State governments add their own taxes, ranging from 2 cents/gallon of beer in Wyoming to $35.22/gallon of the hard stuff in Washington.

Epidemiologists have concluded that boosting those taxes by 10% — about 50 cents for a six-pack of Bud Light — would cut deaths from alcohol-related diseases by 2,000-6,000 per year. Raising taxes would also cut deaths from car crashes, violence, crime, and STDs. Professor Mark Kleiman of New York University says, "The single most effective thing you can to reduce crime right away is to raise the price of alcohol." It wouldn't even mean hiring new cops or building new prisons.

What about the argument that raising alcohol taxes punishes responsible drinkers? The American Journal of Preventative Medicine reports that "higher-risk drinkers would pay nearly 83% of an effective tax increase of 25 cents per drink." And responsible drinkers would benefit from reducing the crime, drunk driving, and health problems they're already paying for without a higher tax.

Of course, raising taxes requires political will — a quality that seems to be in short supply in Washington. 63% of Americans drink. Licensed beverage establishments employ millions of Americans. It's hard to see Congress shunning beverage lobbyists just to satisfy a bunch of lab rats.

There's one way to avoid booze taxes entirely, and that's to just quit drinking. Rolling Stones guitarist Keith Richards, who turned 75 this week but appears likely to live until the sun explodes, just announced that he's given it up. Richards has a long history of enjoying controlled substances, so the alcohol he consumed faced a crowded pharmaceutical environment anyway. But now he's down to just coffee and cigarettes. (Of course, with the pickling effect gone, will everyday diseases of aging realize Richards's body is a safe space for them now?)

We wish you and your family all the best this holiday season. So enjoy your favorite adult beverage in moderation. Because what's the point of calling us to cut your taxes if you aren't around to enjoy the savings?

The Man With the (Tax-Free) Bag

These days it seems like every day brings new controversy to further divide Americans: red states squaring off against blue states and partisanship crossing the line into tribalism. And that's just as true with the holidays as with anything else. Is fruitcake really an abomination? Is Die Hard really a Christmas movie? Is Baby It's Cold Outside really a musical #MeToo violation in two-part harmony?

Fortunately, there are still some headlines that can bring us all back together. So this holiday season, we're especially delighted to remind you that A Visit From Saint Nick is a tax-free celebration. Santa won't be leaving a 1099 under your Christmas tree, and there won't be any Form 1040-GIFT to file after the tree comes down.

Taxable income generally includes all income, from whatever sources received. However, the tax code carves out several exceptions to that rule, much like Grandpa carves the drumsticks out of the holiday turkey. A "gift" is something of value, given without expecting anything in return. IRS Publication 525 states that "in most cases, property you receive as a gift, bequest, or inheritance isn't included in your income." 

"But what about the milk and cookies?" you might ask. "That's the deal, right? Santa shows up with a bag of presents in exchange for cookies and milk (or maybe bourbon and eggnog). Doesn't that transform the whole occasion into a taxable exchange for value?" To which we might respond, "How did you get to be such a Grinch, anyway?"

"Ok, then, what about the gift tax?" you might challenge us next. Well, for starters, that's a levy on your right to give, not receive. So there's never any tax due to the recipient. You can give up to $15,000 each to as many people in a year as you like. If you're married, you and your spouse can join together to give up to $30,000 to every lucky winner. If you give more than $15,000 to a single recipient in a single year, you'll have to report the excess on Form 709. But even then, you won't owe actual tax until your lifetime taxable gifts exceed $11.18 million. 

With those rules in mind, Santa's gotta be awfully generous before Christmas morning turns into a taxable event, even for him. (Granted, a trip to Tiffany's might do the trick.) But there's one last scenario to address — and one last loophole to highlight — before we finish our discussion. That's the Christmas Morning Car, an advertising staple since Lexus launched their "December to Remember" campaign back in 1998. What happens when Santa leaves a shiny new car wrapped in a big red bow in the driveway?

This is the part where we're going to have to shatter some precious childhood illusions. Sorry, boys and girls, but that's not really Santa leaving that Lexus in the driveway. It's just Mom buying the car for Dad, or Dad buying it for Mom. And transfers between spouses are tax-free up to any amount. Which means, once again, that the IRS won't be taking a bite out of your Christmas cheer.

Like everyone else, we wish you the best this holiday time, whether you celebrate Christmas, Hannukah, Kwanzaa, or even Festivus. But we want to offer something a little more tangible. Help us give you the gift of proactive planning. Call us when you're ready to save, and together we'll make the season even brighter!

Paying Your Tax Bill With Magic Beans?

If you pay attention to financial news, you can't escape hearing about Bitcoin and other cryptocurrencies. Bitcoin is just like country music, Justin Bieber, and pineapple on pizza — people either love it, or hate it, but there's no middle ground. The billionaire Warren Buffet dismisses it as a "mirage," a "Buck Rogers" phenomenon, and "rat poison squared." But legions of fans see it someday replacing government-backed currencies. Odds are good that one of the millennials at your holiday table believes in Bitcoin as hopefully as they used to believe in Santa Claus.

Just as Pinocchio always wanted to be a real boy, Bitcoin wants to be real money. That means accomplishing two goals. First, it has to serve as a store of value. You have to be confident that if you put something in, you'll be able to get the same value out. And second, it has to serve as a medium of exchange. That means you have to be able to use it to pay for things just like you would use cash.

So far, Bitcoin's record in both areas is spotty. If you were one of the unfortunates who jumped into the market a year ago at $17,900, you're probably not feeling the love now that it's collapsed to $4,000. Similarly, if you've tried to use it to pay for gas or groceries, you've probably gotten blank stares from the cashier.

And so, at least until now, Bitcoin and its blockchain-based peers like Ethereum have made news mainly for their wild price fluctuations. But last month, Ohio Treasurer Josh Mandel announced the Buckeye State would become the first to accept Bitcoin for tax payments. For now, the program is limited to business filers, although they can use Bitcoin to pay for any type of tax. However, the state plans to expand the program to individuals down the road. (We're not sure if that will happen before or after Ohio finally gets a decent professional football team.)

Treasurer Mandel, who at age 41 is young enough to consider himself an honorary millennial, is a longtime fan of the currency. But last month's move is part of a broader effort to attract software engineers and tech startups to the state. "We're doing this to plant the flag in Ohio as a national and international leader in blockchain technology," said Mandel. 

Ohio has set up a website (of course) at OhioCrypto.com to accept payments. They've engaged a company called Bitpay to process the transactions and convert the coins into cash. The fee for that service is just 1%, which is cheaper than using a credit card.

Will virtual currencies someday break through into the mainstream? At this point, who knows? (We're still waiting for the flying cars we saw on The Jetsons — although Rosie the robot housekeeper is almost here, and you can buy a watch to make video calls with Mr. Spacely for $279). And while Bitcoin itself is grabbing most of the cryptocurrency headlines, it may not be the ultimate winner. (Google wasn't the first online search engine, either.) If recent trends are any guide, Bitcoin will remain a punchline until suddenly, one day, it's not.

Here's the real bottom line of last month's news. The world is changing — and, like it or not, we have to change with it. That's true for tax professionals, too. The Flintstones may have been perfectly happy with someone telling them how much they owe. But the Jetsons want to know how to pay less. That's where we come in — and we're looking forward to helping you through 2019 and beyond!

Carrots Versus Sticks

Take a look at our Internal Revenue Code. No, really, take a good look. (You can buy it on Amazon for just $161.89: two thick paperbacks totaling 4,968 pages. You even get free Prime shipping!) At first glance, it's all about the revenue. For FY 2019, federal income taxes should hit nearly $1.7 trillion. Payroll taxes will top $1.2 trillion. Corporate taxes, $225 billion. And estate taxes will generate somewhere around $20 billion, depending on how many billionaires die (#dropinthebucket).

But taxes aren't just about the revenue. Washington loves to use taxes to accomplish goals they can't legislate directly. This generally takes the form of "tax expenditures" — special deductions, credits, or other rules designed to benefit specific favored activities or taxpayers.

The mortgage interest deduction may be the most famous of these carrots. For most people, homeownership is a cornerstone of the American Dream. But Congress would be hard-pressed to pass legislation requiring it, or even directly rewarding it. (Buy a home! Get a free $5,000 Target gift card!) So instead, they use taxes to subsidize it. For 2018, homeowners saved $68.1 billion by deducting mortgage interest on their taxes. 

But every so often, the government uses taxes as a stick . . . or at least they try to. Last week, the Wall Street Journal published an editorial blowing the whistle on one such effort that may violate the First Amendment. Specifically, it accuses the IRS of punishing nonprofit organizations that advocate for legal marijuana:

"The innocuously named Revenue Procedure 2018-5 contains a well-hidden provision enabling the Service to withhold tax-exempt status from organizations seeking to improve 'business conditions . . . relating to an activity involving controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by federal law.' That means that to obtain tax-exempt status under any provision of the Internal Revenue Code's Section 501 — whether as a charity, social-welfare advocacy group or other type of nonprofit — an organization may not advocate for altering the legal regime applicable to any Schedule I or II substance."

Bottom line, according to the authors: "The IRS seeks to control independent policy advocacy. That's something the federal government may not do." If they can't prohibit the speech directly, they can't use the tax system to do it indirectly. 

Yes, "the devil's lettuce" is still prohibited under federal law. But 33 states have passed laws legalizing it in some form or another. It says a lot that the buttoned-down stiffs at the Wall Street Journal could publish the same editorial as the stoners at High Times magazine. So why would the IRS choose to wield this particular stick? And is it really the IRS's job to make those sorts of decisions anyway? Isn't the IRS just supposed to be the government's bill collector?

As far as we're concerned, we don't care what motivates you more, carrots or sticks. We just want to make sure you get all the breaks the law allows. But we can't do it if you don't ask us. So pick up the phone before time runs out to save in 2018, and lets see how we can put the rules to work for you!

Over-the-Top Thanks For This Tax "Break"

Wall Streeters have a lot to give thanks for this holiday season. Earnings are up, so bonuses are up. And that, in turn, means taxes are up, too. The New York Post just reported that Wall Street Bankers Are Throwing Excessive Parties To Dodge Taxes. But will the wining and dining actually put money back in their pockets? Or is the tax angle just a convenient excuse to party up a storm on the company tab?

Wall Street culture rewards bankers for results. They generally start out with low fixed salaries, at least as a percentage of their overall pay. Then, around this time of year, the bosses get together to count their profits, and shower producers with whatever bonuses it takes to keep them from jumping ship to the competition. In 2017, Wall Street pay jumped 13% to average $422,500 per head. And one consultant predicts sales and trading pros could see 20% more this year in their stockings.

Here's the problem for all those Masters of the Universe glamming it up in their Manhattan condos. Last year's tax bill cut the top federal rate from 39.6% to 37%. However, it also capped deductions for state and local taxes to a flat $10,000. That's a real punch in the gut for Manhattanites paying 13% to the state and city. Throw in 3.8% more for Medicare, and that brings the total skim up to 54%. That's not as bad as the "one for you, nineteen for me" the Beatles sang about in Taxman. But it's hard to get rich if tax collectors are taking home more than you do!

And so, concludes the Post, "Bankers and traders will be celebrating the prospect of massive, multimillion dollar payouts — and they'll use the mega-expenses of year-end blowouts as write-offs for their inflated tax bills, according to industry sources."

It turns out, though, writing off a pricey dinner isn't a very tasty tax shelter. Let's say you treat yourself and three colleagues to the $795/person "white truffle" extravaganza at Daniel, an Upper East Side mainstay. (Relax, your wine pairings are already included in that price!) $3,200 sounds like a lot to shell out for dinner. But after you deduct 50% and multiply it by the 54% tax you save, Uncle Sam covers $864 of that bill. 

Now, $864 might cover the sales tax and tip. But in the end, it's a subsidy, not a savings. Nobody puts money in their pocket by splurging on Florida frog leg mousseline with porcini mushrooms in a white truffle white wine sauce. It's delicious, if you're into that sort of thing, and it looks great in your Instagram feed. But you can't retire on it (unless you're the celebrity chef selling it.) You'd think seven-figure financial wizards would be smart enough to figure that out! (Or maybe they're making so much it doesn't really matter?)

While bankers are out celebrating, they should raise a toast to a different blessing. The law that capped deductions for state and local taxes also eliminated them altogether for business entertainment. But Washington did such a clumsy job writing it that tax pros across the country worried it might have killed writeoffs for meals, too. Last month, the IRS clarified that meals are still deductible, so long as they're not "lavish or extravagant." So you tell us — does $795 for five courses of white truffles pass the test?

Nobody likes paying more tax than they have to, especially when they're paying 54%. But we understand the best tax plans are the ones that help you accomplish financial goals beyond a night out on the town. So call us when you're ready to save, and we'll give you something to celebrate!

LeBron James Scoffs at These Taxes

If you were coaching your kid's basketball team, you wouldn't win many games if you told them to aim for the backboard. Your opponents might love you, but there would be at least one dad in the stands screaming at you the entire time. So why have some tax collectors given up aiming for the hoop and settled for rebounds?

At first glance, the tax code looks like 70,000+ pages of incomprehensible gobbledygook. (Sometimes you really can judge a book by its cover.) But scratch the surface hard enough and you'll find a semblance of order. Add up total income from various sources. Subtract adjustments to gross income and standard or itemized deductions. Calculate the tax based on the remaining net income. Finally, subtract any available credits for doing things Washington is willing to subsidize, like having kids, sending them to college, or driving your kids to college in an electric car.

Easy peasy, right? (Yeah, sure.) In practice, of course, it's a lot harder, and leads to complications like "partnership capital account revaluations," "tentative alternative minimum taxable income," and "auditors crawling up your you-know-what for a week and asking for every Staples receipt from the last three years."

The lane to the net can be even twistier on the corporate side. Multinational corporations have crafted strategies like the "double Irish with a Dutch sandwich" (yes, that's really a thing) to shift income from high-tax countries like the U.S. (35%), to low-tax countries like Ireland (12.5%). Clever lawyers save their clients millions of dollars with these sorts of gyrations, which explains why they wear antique Swiss watches and drive pricey German sports cars.

But what if we didn't have to jump through all those hoops? What if we could just bounce the ball off the backboard and call it good? It turns out that some governments are finding ways to do just that.

In London, Treasury chief Phillip Hammond is proposing a "digital services tax" of 2% of gross revenue on U.S. companies like Google, Amazon, and Facebook. The new levy would raise £400 million per year, regardless of where those companies ultimately send their net to be taxed. The European Union and Spain have proposed similar taxes of 3%, and several more countries are eyeing that bandwagon. Those small percentages may not sound like much. But applying them over a broader base can quickly mean enormous revenue for those countries.

Here in the U.S., several states impose revenue-based taxes instead of traditional corporate income taxes. In Texas, businesses pay 1% of gross receipts over $1 million, or 0.575% over $10 million. In California, LLCs pay a fee of up to $11,790 depending on gross revenue. And in Ohio, businesses pay a flat Commercial Activity Tax of 0.26% on Ohio gross receipts over $1 million. Those amounts may look like small potatoes, but they add up fast. Plus, it's easier for businesses to calculate revenue-based taxes and for auditors to verify them.

The good news is that our old-school income tax raised about half of our federal revenue last year. It would take a Herculanean effort to change that system, especially when Mitch McConnell and Chuck Schumer can't even agree on naming a post office. And that means all your favorite tax breaks are still safe, at least for now. So call us to make sure you're not missing out on any free throws! 

Accountants Behaving Badly, Part 40

Big-league baseball players like the ones who just wrapped up the World Series enjoy careers that last 5.9 years on average, and with 162 games per year, they enjoy lots of chances to be heroes. But eventually, even the best of them hang up their cleats and join the rest of us in the real world. The lucky ones find high-profile gigs running car dealerships or calling games from the broadcast booth. But every once in a while, a former player manages to makes headlines where you'd least expect them — like working as an accountant!

Ben Hendrickson started out looking like he'd become one of the greats. In 2004, the promising right-hander went 11-3 for the International League Indianapolis Indians and won league MVP honors. Then he got his start in the big leagues. Wearing #40, he pitched 11 games for the Milwaukee Brewers, finishing 1-10 with a 7.41 ERA. (If you're not familiar with baseball stats, those numbers are no bueno.) Milwaukee sent him down to their Nashville farm team and eventually traded him away. But Hendrickson never made it back to "the show," and his bright light faded away.

Fast forward to 2018. Hendrickson is working as an accountant for Floors Northwest in Fridley, Minnesota, just north of Minneapolis. Like all too many Americans, he's working paycheck to paycheck and not getting ahead. How can he throw some heat and escape the grind? Hey, here's an idea! Baseball runners who want to advance to the next base don't have to wait for the batter to hit the ball . . . they can just take off running and steal it! So, if Hendrickson wants more money so badly, why not just steal it from the company?

Last week, Anoka County District Court charged Hendrickson with four counts of "theft by swindle," totaling about $250,000. That's a refreshingly blunt description for the charges against Hendrickson, which can mean trading him away for up to 20 years in a place with no organized baseball whatsoever.

Here's how the Minneapolis Star-Tribune described the criminal mastermind's evil plan:

"While working for Floors Northwest in Fridley, where Hendrickson worked for several years until he left his job last year, he would alter the amount of cash received to make it look like less was collected from sales staff. Hendrickson deposited the lower amount and kept the rest. Nearly $160,000 of the money he stole was taken in the final two years of his employment. He also allegedly shifted $10,000 of the company's money to a personal health care account that paid his medical bills."

Hendrickson admits he stole the money . . . but says he thought he took between $50,000 and $75,000. Which begs the question, just how bad an accountant do you have to be to not count how much you stole? After failing at baseball and bookkeeping, Hendrickson may find that a few years in the metalworking field (specifically, stamping license plates for 11 cents/hour) may be just the vocational training he needs!

We all understand wanting to get ahead. Fortunately, there's an easy way to do it, without risking a trip to the pokey. Call us for a tax plan, and see how many dollars we can advance into your pocket. We think of your average tax rate as your financial "earned run average," and we do everything legal to keep it as low as possible. So call us to take a swing, and watch us bring the heat!