Tuesday, October 21, 2014

How to Guarantee an Audit

Most of us would rather have a root canal without anesthesia than face an IRS audit. Fortunately, your chances of winding up in that particular hot seat are fairly low. Audit odds vary according to how much you earn and how you earn it, but generally range from 0.9% (for incomes up to $200,000) to 12.1% (for incomes over $1 million). That means most of us can take comfort knowing our chances of winding up in the crosshairs are slim.  
Now, if you look up "guaranteed audit" in the dictionary, you won't find it, because it's two separate words. Still, there is one way you guarantee yourself an audit. And some of your most prominent fellow citizens are working night and day to put themselves in that position. So, how do you get there? Easy . . . just get yourself elected President of the United States!  
Take a look at Section of the Internal Revenue Manual and you'll see it in black and white: "The individual income tax returns for the President and Vice-President are subject to mandatory examinations." Yikes! As if it's not bad enough having everyone from the New York Times to the National Enquirer all up in your business, now you'd have to contend with the IRS, too!  
Presidential audits are no ordinary examinations. The Internal Revenue Manual spells out the kind of excruciatingly detailed rules that you might imagine for the "First 1040":
•"The returns should be kept in an orange folder at all times." (We wouldn't want to confuse them with the President's nuclear launch codes in the red folder.) 
•"The returns should not be exposed to viewing by other employees." (Of course, Presidents routinely release their returns to the public, so employees without "Double Secret Presidential Clearance" will just have to find them online.)
•"The returns should be locked in a secure drawer or cabinet when the examiner is away from the work area." (Gotta keep those Russian teenagers from hacking in and running up the balance on the President's American Express!)  
The kid-glove treatment doesn't stop when the audit ends, either. Presidential returns "must be closed directly to the Employee Audit Reviewer in Baltimore Technical Services. The 'Other' box in the 'Forward to Technical Services' section of Form 3198 must be checked and the examiner should notate 'President (or Vice-President) Examination; Forward to Baltimore Technical Services.'" That's reassuring — can you imagine how embarrassing it would be send the Presidential return to the wrong archive!  
On the bright side, if you do find yourself having to put up with that mandatory annual audit, you'll get some nice perks out of it: a fleet of limousines, a comfy jumbo jet for avoiding the TSA's usual "perp walk", and a roomy white house on 18 acres in the middle of Washington, DC. You can even walk to work! Still, there might be a nagging feeling in the back of your mind, knowing the IRS has isolated your return like an Ebola specimen — in its own special orange folder, under lock and key.
 We realize that you aren't getting ready to move to 1600 Pennsylvania Avenue. But we make sure that our tax planning advice can stand up to a Presidential-level audit. It all starts with a proactive plan to take advantage of every legal deduction, credit, and strategy to cut your tax. So call us for that plan, and you'll have more to contribute to your White House run!

Monday, October 13, 2014

The Art of the Tax Loss

Everyone knows what a hobby is, right? It's something you do to relax and have fun, not something you do as an occupation. And everyone knows what a business is, too. It's something you do to make money. So everyone should know the difference between a hobby and a business, right? Well, it turns out that's a harder question than you might think — especially where our friends at the IRS are concerned.
This week's story concerns Susan Crile, a tenured professor of studio art at Hunter College in New York City. Teaching art is her "business," and she earns a respectable professional income from it — from 2004 through 2009, her salary grew from $85,999 to $106,058.
But Susan was a distinguished painter and print maker long before securing her coveted teaching position. She's sold 356 works of art since 1971. Her work hangs in the permanent collections of at least 25 museums, including the Metropolitan Museum of Art and the Guggenheim Museum. It also graces Fortune 500 and government offices, including the Federal Reserve Board, the Library of Congress, and various U.S. embassies. Criles works approximately 30 hours per week in her Manhattan studio during the academic year, and full time at a larger studio upstate in the summer. She also travels extensively for her work, including a trip to Kuwait to depict burning oil fields during the first Gulf War.
You would hope that an artist as accomplished as Criles would enjoy fame and fortune from her work. She may be famous, at least in the art world, but fortune seems to be lagging. She's grossed as much as $111,815 from sales in a year, but never shown a profit. From 2004 through 2009, Criles reported just $15,865 in income from her art. But for that same period, she reported $286,976 in expenses. These included the cost of materials, of course, but also expenses for vehicles, mortgage interest (presumably on her studio property), travel, meals and entertainment, utilities, research, maintenance, and local transportation.
Unfortunately, you don't have to take any art classes to become a tax auditor. Maybe that's why the critics at the IRS panned her tax returns. They called her art a hobby, not a business, and used the so-called "hobby loss" rule to disallow all her deductions exceeding her income. Then they presented her with their review — a bill for $98,547 in taxes and penalties!
Tax Court judge Albert Lauber agreed that some of Criles's deductions, like telephone and cable TV bills, newspaper subscriptions, tips to her doormen, and cabs to the opera, museums, and social events, were inappropriately personal and ought to be disallowed. But then he addressed the real question: had she created her art with a bona fide intent to earn a profit? Fortunately, the tax system offers a nine-factor "paint by numbers" test for distinguishing a hobby from a business, and the judge concluded that Criles's time, effort, and expertise outweighed her spotty income over time. Deduction upheld!

Do you have a hobby that makes (or loses) money? Maybe it isn't really a "hobby" at all, and maybe you can take advantage of it come tax time. The only way to know for sure is to call us and ask for a plan to make the most of your activity. So call us today while there's still time to plan for 2014, and together we'll see if we can paint a picture of savings!

Monday, October 6, 2014

What Do You Give the Man Who Has Everything?

Last week, New York Yankee shortstop and future Hall-of-Famer Derek Jeter played his last Major League Baseball game. He chopped a single to third in the third inning to drive in a run, then took himself out for good. That final hit brings his total to 3,465 hits, along with a .310 batting average, five Gold Glove awards, and five World Series rings. Jeter was that rare player who stayed with a single club for his entire career. He's also untainted by so-called "performance enhancing drugs" plaguing the game (or, in the case of Jeter's teammate Alex Rodriguez, you can leave off "performance enhancing"). Jeter goes out a very popular guy — and that popularity is about to send him into extra innings with our friends at the IRS.
Jeter earned over $265 million over the course of his 20-year career. And that's before his endorsement deals with Gatorade, Fleet Bank, Ford, VISA, Discover Card, Florsheim, Gillette, Skippy peanut butter, XM Satellite radio, and even his own Nike shoe. If ever there were a guy who could buy anything he wanted, it's "Captain Clutch."
But that didn't stop the baseball world from showering him with gifts upon his retirement. The Tampa Bay Devil Rays gave him a custom-painted kayak that cost more than $6,000. The Cincinnati Reds gave him framed autographed jerseys of fellow shortstops Dave Concepcion and Barry Larkin, along with three photos from the weekend in Cincinnati when Jeter was named captain of the Yankees. The Seattle Mariners gave him a seat from the Kingdome, where he made his major league debut on May 29, 1995. Even the lowly Chicago Cubs, which hosted Jeter for just five career games, honored him with a number from the hand-operated scoreboard. All told, the gifts are said to be worth about $33,000.
So, naturally, Jeter will owe another $16,000 or so in tax on those gifts. That includes 39.6% federal income tax, 3.8% Medicare tax, plus whatever state and local taxes apply where he receives the gifts.
Wait a minute. We're talking gifts here, right? How can Jeter owe income tax on gifts?
It all comes down to why the giver makes the gift. If a gift is made out of "detached and disinterested generosity," like when you give your children a birthday present, the officials in charge of collecting income tax generally turn a blind eye. (If the value of gifts to any single individual exceed $14,000 per year, the officials in charge of collecting gift taxes start getting interested.) But if the gift is really a marketing gesture in disguise — like when a team hosts a ceremony to present Jeter with his gift, then uses it as part of its marketing — that "gift" becomes taxable income.
What could Jeter do to avoid the tax? He could refuse the gifts, which wouldn't seem very sporting. Or he could request they go to his charitable foundation. But that would defeat the purpose of gifts like the Cincinnati shortstops' jerseys that are intended to be sentimental rather than valuable.
Jeter's final-season salary was $12 million, which works out to about $74,000 per game, or $8,230 per inning. So the good news is that the tax on the gifts should only eat up a couple of inning's worth of income.

Are your business associates planning to lavish you with gifts this holiday season? Call us. We know you won't be happy to pay tax on them, but at least we can help you with a plan to pay the least amount allowed. And remember, we're here for the rest of your teammates, too!

Monday, September 29, 2014

Taxing Situation

MTV's Jersey Shore premiered in late 2009 and quickly became the network's most-watched series ever. Cast members Nicole "Snooki" Polizzi, Mike "The Situation" Sorrentino, Jennifer "JWoww" Farley, and their outrageous, hard-partying housemates have become New Jersey's most famous family since The Sopranos, trying their best to put the "fun" back in "dysfunctional."
Of course, not everyone was in on the joke. Critics objected that the show painted New Jerseyites and Italian-Americans as drunken, brawling louts, obsessed with their "GTL" (gym, tanning, and laundry, for those not in-the-know). New Jersey Governor Chris Christie was so embarrassed at their antics that he vetoed a $420,000 tax credit, dubbed the "Snooki subsidy," for the show's producers. "As Chief Executive," he explained, "I am duty-bound to ensure that taxpayers are not footing a $420,000 bill for a project which does nothing more than perpetuate misconceptions about the state and its citizens."
Now the Jersey Shore crew is making tax news again. But this time, the numbers are even higher and the consequences even more serious. Last week, the U.S. Department of Justice indicted "The Situation" for one count of conspiracy, two counts of filing false tax returns for 2010 through 2012, and one count of failing to file a return for 2011.
Sorrentino and his cast mates may look like the sort of people the word "bonehead" was invented to describe. But when it came to cashing in on their 15 minutes of fame, they weren't slouches. Snooki made as much as $30,000 per episode, commanded $10,000 for personal appearances, and rang the bell to open the New York Stock Exchange. Sorrentino was even more ambitious, charging up to $48,000 for nightclub openings and other events. He also earned millions more from endorsements, a partnership in a vodka company, an "autobiography," a workout DVD, clothing and vitamin lines, and a comic book featuring himself as a shirtless superhero. (The guy made more than $5 million in 2010 alone, which has to make you wonder if you're in the right business — and if there's any justice in the world.)
Now the government is alleging that Sorrentino and his brother Marc avoided tax on $8.9 million of income. The indictment charges that they submitted false documents understating their receipts, and false personal returns failing to report all their income. They also fraudulently "claimed millions of dollars in personal expenses as business expenses, including payments for high-end vehicles and clothing, personal grooming expenses, and distributions – or direct payments – from the businesses to personal bank accounts." It's easy enough to believe that a guy who made his fame on "gym, tanning, and laundry" would think he could deduct the occasional tube of hair gel. Still, $8.9 million does seem a bit excessive.
Sorrentino has pled not guilty to the charges. Meanwhile, he's free on $250,000 bail. He's surrendered his passport and agreed not to leave the New York-New Jersey area. He's also subject to random drug testing and prohibited from drinking alcohol until his trial. Of course, a little sobriety looks like a holiday on the shore compared to what he's facing if he's convicted — the conspiracy charge alone could mean five years in a tightly structured living environment that discourages expressions of personal dress and style.

Sadly, "The Situation" isn't the only Garden State reality star facing IRS heat. "Real Housewife of New Jersey" Teresa Giudice and her husband are awaiting sentencing on their own tax and fraud charges. What's the matter with these people? Don't they know the real key to paying less tax is a plan? And don't they know they could have come to us for that plan? Don't embarrass your cast mates like they did. Call us, and we'll script out a plan that helps you enjoy endless summers on whatever shore you choose.

Tuesday, September 23, 2014

Lipstick on a Pig?

The personal finance website mint.com reports the average American woman spends $15,000 on makeup in her lifetime, including $3,770 on mascara, $2,750 on eye shadow, and $1,780 on lipstick. Americans spent $33.3 billion on cosmetics and other beauty products in 2010 alone. ("Being a woman is easy and inexpensive," said no one, ever.)
Our friends at the Internal Revenue Service don't bat an eyelash at all that spending. Cosmetics companies pay billions in taxes. And the product they sell is a nondeductible personal item. But that doesn't stop people from trying — including, we now learn, former United States Senator Scott Brown.
Brown has always been an ambitious sort. In 2010, after a career as a lawyer and state legislator, he won a special election to replace the late Ted Kennedy, becoming the first Republican Senator from Massachusetts since 1972. Then, in 2012, he lost his reelection bid to former Harvard professor Elizabeth Warren. Following his defeat, he moved north to New Hampshire and announced plans to run from the Granite State.
But Brown has always had a bit of a vain streak, too. At age 22, while studying law at Boston College, he won Cosmopolitan's "Sexiest Man in America" contest, posing nude for the magazine's centerfold. So it can't have come as too much of a surprise when he made six years of tax returns available to reporters and revealed that he deducted $2,149 in 2010 and $1,401 in 2011 for "TV makeup and grooming" to help promote his memoirs.
At first blush, deducting makeup might seem perfectly appropriate. Brown probably wouldn't wear it if he hadn't been promoting his book. The problem here is that the rules say that's not enough. IRS Publication 529 reports that you can deduct the cost of work clothes if: 1) "you must wear them as a condition of your employment" and 2) "the clothes are not suitable for everyday wear." Courts have extended this foundation to grooming expenses, holding that they're inherently personal and nondeductible.
Most recently, the Tax Court reviewed the case of Anietra Hamper, who worked as a morning and noon news anchor for WNBS-TV in Columbus. Her station's Women's Wardrobe Guidelines required her to maintain her hair in a neat and professional cut and keep her fingernails at a reasonable length, finished with conservatively colored polish. Yet the Court smeared off thousands in deductions she took for contact lenses, makeup, haircuts, manicures, and teeth whitening.
Last week, a Democratic watchdog group by the name of the American Democracy Legal Fund sent a letter asking the IRS to investigate Brown's deductions and citing a litany of cases holding that personal grooming and makeup expenses are nondeductible. Brown's campaign glossed over the letter as a partisan attack. But Brown is polling about four points behind incumbent Jeanne Shaheen, in a close election that will help determine which party controls the Senate for the final two years of President Obama's administration. This sort of negative publicity can't help Brown's chances. And it does nothing to conceal the stereotype of politicians as slick, blow-dried phonies.
Only time will tell if the IRS takes up Brown's case, or if the controversy affects his election. In the meantime, call us if you're worried about blemishes in your finances. We'll give you the plan you need to look flawless under the hottest lights!

Tuesday, September 16, 2014

Can We Talk?

The world of comedy lost a giant this month. Joan Rivers may have topped out at just 5'2" and weighed 110 pounds soaking wet, but when it comes to influence, she towered above her peers. Rivers established that women can be just as funny as men and paved the way for the Sarah Silvermans and Tina Feys of today. She could alienate people with sometimes-offensive takes on her fellow celebrities. ("Is Elizabeth Taylor fat? Her favorite food is seconds.") But she was never afraid to turn her wit on herself. ("I've had so much plastic surgery, when I die, they will donate my body to Tupperware.")
Rivers hated Washington, and considered herself apolitical. But it's hard to go 50 years in the public eye without having something to say, especially when it comes to taxes. So here are three quick observations:
  • Money was important to Rivers. ("People say that money is not the key to happiness, but I always figured if you have enough money, you can have a key made.") She worked hard to make it and worked hard to keep it. Back in 2012, she criticized President Obama's proposal to raise taxes: "If I work very hard, I should be able to gather the fruits of my labor." Of course, this was a woman who also said "I'm definitely in favor of a monarchy because they're there, they look good, and always have good gift shops when you leave the palace." So, you might want to take her specific policy recommendations with a grain of salt!
  • Rivers wasn't afraid to take on the jokers at the IRS. Back in 1993, she lost a Tax Court case involving disability insurance premiums. The dispute established the rule that a corporation can't deduct those premiums on an employee unless there's a contractually binding obligation to pay the benefits to the employee. (We'll skip the details because they're so boring and technical that even she couldn't make them amusing.)
  • Rivers will get a pretty nice final tax break from the IRS, even though it comes too late for her to enjoy it. Code Section 2053 says that when it comes time to calculating estate tax, you can deduct funeral expenses. And Rivers made it clear that she wanted to go out in style. Here's what she said in her 2012 book, I Hate Everyone . . . Starting with Me:
    "When I die, I want my funeral to be a huge showbiz affair with lights, cameras, action. I want Craft services, I want paparazzi and I want publicists making a scene! I want it to be Hollywood all the way. I don’t want some rabbi rambling on; I want Meryl Streep crying, in five different accents. I don’t want a eulogy; I want Bobby Vinton to pick up my head and sing 'Mr. Lonely.' I want to look gorgeous, better dead than I do alive. I want to be buried in a Valentino gown and I want Harry Winston to make me a toe tag. And I want a wind machine so that even in the casket my hair is blowing just like BeyoncĂ©’s."
She may not have gotten the funeral she joked about. But she did get a pack of celebrities, a troupe of bagpipes, and a celebration of a life well lived.
Joan Rivers entertained millions over the course of her career. But there's nothing entertaining about wasting money on taxes you don't have to pay. And you'll get the last laugh if you know you've done everything you can to keep what you make. So call us for a plan to pay less, before the comics at the IRS throw out the punch line for you!

Tuesday, September 9, 2014

No Such Thing As a Tax-Free Lunch

Silicon Valley's high-tech employers are famous for feeding their employees at work. It's not entirely selfless — feeding people helps attract talented workers and keep them chained to their desks. At this point, it's no longer a novelty — it's an expected part of Silicon Valley culture. Companies routinely make headlines for luring away each others' executives and programmers. But back in 2008, Facebook made headlines for poaching Google's chef!
Employers know that if they're going to use lunch to compete for talent, it oughta be good. The average computer nerd may be perfectly happy scarfing down Cheetos in his parents' basement. But six-figure software engineers demand more. So, for example, Google offers employees 30 different "cafes" at their Mountain View campus, serving delicacies like squash-corn-pecan dumplings, and daal saagwala from Northern India: "a mix of soft kale, spinach, and mustard greens, tossed with three types of beans and lentils in a broth singing with distinct cumin notes and a pleasant cilantro flourish." (We suspect that if they had served anything in honor of last month's International Bacon Day, it would have been so insanely good that you could never look a pig in the eye again.)
The best part? It's all free! But that may not be true much longer, if the food critics at the IRS have their way. Last month, they released their 2014-2015 Priority Guidance Plan, which reveals their 317 priority "projects we intend to work on actively during the plan year." And there on Page 7, sandwiched between "Regulations under §86 regarding rules for lump-sum elections" and "Regulations on cafeteria plans under §125," you'll find "Guidance under §§119 and 132 regarding employer-provided meals."
Ironically, free lunches have nothing to do with "cafeteria plans." The relevant regulations at 26 CFR 1.119-1 provide that "The value of meals furnished to an employee by his employer shall be excluded from the employee’s gross income if two tests are met: (i) The meals are furnished on the business premises of the employer, and (ii) the meals are furnished for the convenience of the employer."
Sounds pretty straightforward, right? Marketing software maker Moz.com gives employees a never-ending cereal bar. They serve it at their business headquarters, and they do it to keep employees from running to the In-N-Out Burger down the street. So what's the problem? Well, the IRS thinks that all that Cap'n Crunch may be more than just a convenient employee perk. They're worried that it's actually disguised compensation. And they're licking their chops at the thought of all the tasty revenue they can raise if they're right. (Don't even get them started on that 24-7 on-tap keg at apartmentrental.com!)
If the IRS concludes that meals are part of compensation, they'll be included in employees' W2s and taxed just like the rest of their paychecks. And while the occasional daal saagwala might not sound like much, those meals can add up fast. Let's see here . . . 1,000 employees eating $8 meals, five times per week, adds up to $2 million in new taxable income per year from just this one example — plus more for Social Security and Medicare. No wonder the carnivores at the IRS are sharpening their knives! (Of course, they'll have to issue even more new regulations telling us how to value all those meals. But bureaucrats love writing regulations even more than they love Cap'n Crunch!)
You may not be worried about all this if you're not getting a free lunch at work. But remember, the IRS has 316 other "priority projects" on its plate. And it's our job to keep an eye out for the ones that hit your wallet. So call us when you're ready for the plan you need to protect yourself from them all!