Monday, May 22, 2017

Hitting a Tax Gapper

Summer is almost here, and sports fans across America have a lot to look forward to. Basketball's 13-month-long season is (finally) starting to heat up. Hockey playoffs are coming to a close. Baseball is in full swing, and NFLers are about to report to training camps. Stop at any bar or water cooler in the land, and you'll hear talk of wins, losses, and plays that you just have to see.
Fans and analysts have all sorts of statistics they can use to measure (and argue about) their teams' performance. "Turf investors" have relied on The Daily Racing Form for over a century. Baseball is famed for legions of "sabermetricians," who obsess over statistics like WAR (Wins Above Replacement), BABIP (Batting Average on Balls in Play), and LWCT (Largest Wad Of Chewing Tobacco). Football and basketball too, even hockey, all lend themselves to measures far beyond the mere score at the end of the game.
But there's one more sports statistic we might need to evaluate our favorite team by, and that's SITR (State Income Tax Rate).
Erik Hembre is an Assistant Professor of Economics at the University of Illinois at Chicago. He's just released a paper titled "Income Taxes and Team Performance: Do They Matter?" (He's also probably lined himself up a sweet gig with a struggling team somewhere if the whole "assistant professor" thing doesn't work out.)
Hembre started his analysis with win-loss records from the last 40 years of the "Big Four" professional sports. Next, he added data on state top marginal income tax rates. Finally, he regressed the tax rates through the win percentages to estimate their effect, using the following equation:
Yit = β0 + β1πit + β2Xit + εit
So the winning percentage Yit for team i in year t is a function of . . . you know what, just the sight of those Greek letters probably makes your head hurt too, so let's just skip it!
Here's the final score: "state income tax rates significantly impact team performance." In the NBA, where the tax effect is greatest, moving a team from high-tax Minnesota to tax-free Florida should yield 4.7 more wins per year. That's the equivalent of swapping a mediocre benchwarmer for a 2015 version of Draymond Green. In baseball, where there's no salary cap and the tax effect is lowest, the same move would still add 1.6 Ws per year. And this effect is accelerating over time as free agents gain more mobility across teams.
Why would state tax rates matter? Hembre speculates that low rates make it easier for teams to bid for players. State rates range from zero to 14%. But after players have paid agents, managers, and federal taxes, "the effective rate of state taxes may be more than twice as high as the nominal rate."
You may not think you have a lot in common with athletes weighing seven- and eight-figure contracts. But when they look at state income tax rates to compare offers, they're doing tax planning. And you can do that same sort of planning yourself, even without those offers. So call us when you're ready to play ball, and let's see if we can help you hit a grand slam!

Tuesday, May 16, 2017

"And the Award Goes To . . . ."

Right now, all across America, thousands of talented youngsters are dreaming of careers in performing arts. Whether they aspire to be the next Meryl Streep, or Taylor Swift, or Lin-Manuel Miranda, they understand the odds of success are long. But they still dream that one day they'll find themselves in the audience at the Oscars, the Grammys, or the Tonys, waiting with their hearts in their throats as a tuxedo-clad presenter opens an envelope and reads their name.
At the same time, thousands more Americans grow up dreaming of careers in law enforcement. These future Elliot Nesses aren't looking for the red carpets or glamour of Hollywood. But there are awards waiting for the best of them, too. And this year, our friends at the IRS are basking in those bright lights.
The Financial Crimes Enforcement Network (FinCEN) is a bureau of the U.S. Treasury dedicated to protecting the financial system's integrity. Every year, it hosts a Law Enforcement Awards ceremony at the Treasury's headquarters. The program includes awards in six categories: suspicious activity reporting, transnational organized crime, transnational security threats, cyber threats, significant fraud, and third-party money laundering. (Six awards should make for a much shorter awards show than the Oscars, even after allowing time for the musical numbers!)
This year, incoming Treasury Secretary Steven Mnuchin hosted the awards for the first time. (No word on whether paparazzi quizzed him about his outfit, but we suspect not.) And when he opened the envelope for the cyber threat category, the it was the IRS Criminal Investigation unit that took home the trophy, for its work leading the multi-agency task force that took down the Silk Road online marketplace.
Technology has disrupted all sorts of industries. Just look at what Uber has done to taxi cabs! So it shouldn't come as a surprise that innovators have disrupted the neighborhood drug dealer, too. It all centered on a site called the Silk Road, where buyers and sellers connected to buy drugs like methamphetamines and marijuana. Buyers used "the onion router," or TOR, to mask their IP addresses. They paid in bitcoin to hide their sources and even gave dealers "star ratings" like they would praise a local deli on Yelp.
Unfortunately, the high-tech pharmaceutical retailers lining that silk road had to rely on the decidedly old-school Postal Service, founded back in 1775 by Benjamin Franklin, to deliver the goods. Postal inspectors discovered that as many as 435 suspicious packages had come from the same place. The IRS-led task force then secured the necessary warrants, intercepted shipments, and made their case. (Ruh roh.)
Ironically, the targets pled guilty to drug crimes and money laundering, not tax crimes. That's not unusual, though — IRS special agents regularly lends their expertise to non-tax investigations. It's also worth mentioning that this was the first case in this particular district where money laundering charges were based on bitcoin transactions, which shows how law enforcement keeps up with developments in crime technology.
The odds that you'll find yourself on the receiving end of a FinCen Law Enforcement Award are probably as long as your odds of someday accepting an Oscar. But if you haven't done your planning, the odds are good that you're paying more tax than you have to. So call us when you're ready to pay less. You'll be glad you did, even if there's no red carpet waiting for you!

Tuesday, May 9, 2017

Taxing the Roses

Every year on the first Saturday in May, an enormous crowd of socialites, "turf investors," and people just looking for a party descends on Churchill Downs for the Kentucky Derby. It's an unforgettable pageant of mint juleps, fashionable hats, and the most exciting two minutes in sports. This year, the favorite Always Dreaming leaped first out of the gate, left challenger Battle of Midway after a mile, and sploshed the rest of the way down the muddy backstretch to his victory. The winner paid $11.40 on a $2 bet to win and landed his owners a tidy $1,635,800 purse.

A horse is a horse, of course, of course, and no one can run like a horse, of course. But while Always Dreaming gets the glory and the roses, he couldn't do it all by himself. Who helped? There were his owners, Anthony Bonomo and Vincent Viola, who spotted his potential. There was his trainer, Todd Pletcher, and his jockey, John Velazquez, each of whom had already won a Kentucky Derby. And, of course, there was the U.S. tax code, whose generous subsidies help make horse racing possible in the first place.

Here's the dark reality behind racing's bright silks. Only one horse gets to claim that seven-figure Derby purse in a year, and most horses never clear a profit in their life. For the majority of owners, "investing" in racehorses is like "investing" in lottery tickets. And for most of them, that's ok — their horses are just a (very expensive) hobby.

Here's where the handicappers at the IRS come in. Code Section 183 — also known as the "hobby loss" rule — says that you can deduct losses from your business against your other income — but you can't deduct losses from your hobby. So . . . how do you know the difference? The basic rule is that you have to enter into the activity with an intent to make a profit. You don't even have to have an expectation as long as you have the necessary intent.

The code offers a helpful rule of thumb to make that determination easier. For most activities, if you make a profit in three out of five years, you're presumed to be engaging in it with an intent to make a profit. (That's not a hard and fast rule, by the way, and some tax professionals will tell you that if you don't make a profit in three of those five years, your losses are scratched. That's not actually true — it just means you have to work a little harder to prove your bona fide business intent.)

But there's one kind of business that gets a special pass on the rules, and gets to make hay just two out of seven years to take advantage of that for-profit presumption. You've probably already guessed — it's activities "which consist in major part of the breeding, training, showing, or racing of horses."

The two-out-of-seven standard isn't the only break racehorses get. The tax code lets you depreciate them the same way they depreciate a trailer or a barn. Most horses depreciate over seven years — but racehorses depreciate over just three. (Why? Because you're buying them to make money.) Recovering your investment faster lets you use the savings to buy more horses. (It's sort of like taking winning lottery tickets and using the proceeds to buy more lottery tickets. At some point, you really ought to take your winnings off the table.)

Want a hot tip on a sure thing? There's no need to gamble on your taxes when a smart plan can help you pay less. So call us when you're ready to finish in the money!

Tuesday, May 2, 2017

The Taxing History Behind Cinco de Mayo

Americans are great at taking perfectly serviceable holidays and turning them into excuses for parties. On St. Patrick's Day, millions of Irish-for-a-day drinkers belly up to their favorite fake Irish bar to down pints of Guinness and shots of Jameson. Next on the calendar is Cinco de Mayo, when all those same St. Paddy's fans become Mexicans for a day to down bottles of Corona and pitchers of margaritas. (We can't wait to see what the hospitality industry dreams up when they discover Talk Like a Pirate Day lurking on the September calendar.)

You may already have Cinco de Mayo reservations penciled into your calendar. But how many know the role that taxes played in putting those tangy salt-rimmed cocktails on your Happy Hour menu?

Back in 1862, we were struggling in the midst of a wrenching civil war. And south of the border, Mexico had just finished one of their own. The ruling liberals had passed a series of laws that, among other things, let the government tax the dominant Catholic church. The rival conservatives objected, with the dispute ultimately leading to war. After three years of fighting, the liberals prevailed. But incoming president Benito Juarez found his Treasury empty, and he issued a decree suspending foreign debt repayment for two years.

French Emperor Napoleon III wasn't willing to just write off the loss. More importantly, he also spied a chance to take advantage of the turmoil here in the U.S. to reestablish French influence in the western hemisphere. So he sent his army to the port of Veracruz to collect what Mexico owed. And his troops began marching down the road to Mexico City. Unfortunately for the French, that road led through the hilltop town of Puebla de Los Angeles.

On May 5 — Cinco de Mayo — 6,000 French troops marched up Guadalupe Hill to take the town from 2,000 poorly equipped defenders. Everyone expected a rout — but it was the Mexicans who did the routing, firing downhill to pick off the advancers. The few French who reached the top faced machete-wielding Zacapoaxtla Indians, with depressingly predictable results. It was a small but symbolic victory that gave the Mexicans hope that they could repel the European invaders.

Victory was short-lived. A year later, the French reached Mexico City and installed the Austrian Archduke Ferdinand Maximilian as Emperor of Mexico. But France wasn't willing to actually support their new puppet monarch with their army. So, after three more years of chaos, Ferdinand and his top generals found themselves on the business end of a firing squad.

Cinco de Mayo remained a little-noticed holiday until the 1980s, when beer marketers began using it as an excuse to promote their sudsy wares. Ironically, it's barely celebrated at all in Mexico.

We realize it's a stretch to say that Mexico's decision to tax the church led to your Cinco de Mayo celebration. But when you're in the tax business, like we are, you see way too many things through that lens. And isn't that what you want? A vigilant sentry, standing guard over your finances, wielding tax-saving strategies like a tribe of bloodthirsty Zacapoaxtalas wielding machetes? So call us when you're ready to celebrate paying less . . . and have a margarita on us!

Tuesday, April 25, 2017

Why Did the Loophole Cross the Road?

We've just made it through our annual exercise in self-flagellation known as "tax filing season." And who's fault is that? Don't blame the IRS, blame the Congress that wrote the four million-odd words that make up the tax code. So it's always refreshing to see someone inside that particular lion's den take a critical look at what Congress has wrought.

Jeff Flake is a freshman Senator from Arizona who's not interested in taking responsibility for the current system, which was written mainly by men who came of age when Packards and Studebakers filled the streets. This month, he issued a report called "Tax Rackets" that takes aim at so-called "outlandish loopholes" that taxpayers like alpaca farmers, magazine publishers, and golf course operators use to legally lower their bills.

Flake shovels a steaming load of scorn on Section 45 credits for programs to create energy from "open loop biomass" — otherwise known as chicken "litter." Chicken farmers in the DelMarVa peninsula, which includes Delaware, Maryland's eastern shore, and the Virginia peninsula, produce 550,000 tons of droppings every year. They've been using it for fertilizer. But now the runoff is polluting Chesapeake Bay. So the area's representatives hatched legislation offering tax credits for selling the "litter" to power plants.

The problem, says Flake, is that the initiative isn't "everything it was cracked up to be." There are already plenty of government subsidies for poop-to-power programs. (Flake's words, not ours.) But nobody seems to want them. "Plans to build the power plants have ruffled the feathers of the very taxpayers being forced to subsidize the energy they would produce. The squawking by citizens caused [one litter-to-energy producer] to scratch plans to build plants in Virginia, North Carolina, and Georgia." Flake concludes that, "subsidizing energy companies for producing poultry poop power is a bird brained idea that smells like a rotten egg."

Flake also fires shots at the developers of American Dreamland, who are requesting tax-subsidized municipal bonds to finish a $5 billion mall in (where else) New Jersey. We're not talking your usual soulless suburban shopping center here. Dreamland will include three million square feet of space, 30,000 parking spots, 450 shops and restaurants, an indoor waterpark, a roller coaster, a Ferris wheel, and an 800-foot indoor ski slope. Developers claim it will create 11,000 jobs and generate $1.5 billion in annual sales. What's not to like?

Except . . . two developers already dropped $2 billion on the boondoggle before slinking off in defeat. The third one wants a billion more in subsidized bonds to cross the finish line. It's going up in the only county left in America that still outlaws shopping on Sunday. And millions of shoppers are giving up entirely on mall traffic, mall crowds, and mall hype to order online. The latest developer boasts that "it's going to be the No. 1 tourist destination, bar none, in the world." (But he can't actually believe that, can he?)

Flake says the subsidies he's exposed will cost taxpayers $50 billion over the next decade. The challenge from his perspective is getting Congress to do something about it. It's been years since Congress could even walk and chew gum at the same time, and legislation today moves slower than geology.

Good thing there's a silver lining lurking deep inside this story. Sure, the current code is a mess. But at least we understand it. So you don't have to pour your hard-earned dollars into poop-to-power programs to pay less. You just need a plan. So call us, and see how much more you can take to the newest mall!

Tuesday, April 18, 2017

Monopoly Money

In 1935, Americans were mired in the depths of the Great Depression. Gross domestic product had shrunk from $103.6 billion in 1929 to $73.3 billion. Unemployment stood at a horrendous 20.1%. Even the suicide rate was higher during those dark years. And on February 6th of that year, the Parker Brothers company started selling an escape from all that misery: a family-friendly board game that anyone could afford, called Monopoly.
When most of us picture the Monopoly board, we see the familiar rows of streets, named after those in Atlantic City: Boardwalk, Park Place, and all the rest. (Some contrarian always says that lowly Baltic Avenue, priced at just $60, is their favorite. That someone always goes bankrupt first.) Some players prefer "Chance," "Community Chest," or taking a ride on the Reading Railroad. And if someone tells you their favorite squares are the Luxury Tax (pay $75) or Income Tax (pay $200 or 10%), you give them a funny look and wonder what went wrong in their childhood.
But how many of you know that Monopoly was originally created back in 1903 to illustrate a theory about taxes?
Elizabeth "Lizzie" Magie was a stenographer, writer, comedienne, actress, and engineer. In 1903, she patented The Landlord's Game to reveal the evils of "land monopolism" — basically, profiting from the rent you can charge for the use of land. (Evil, right?) Her solution was the philosopher Henry George's "single-tax" theory, which holds that people should own the fruit of their own labor, but that land and natural resources should be shared equally by everyone. George believed that taxing land value is the fairest form of tax, and a properly-administered land-value tax can help society reduce taxes on labor or other investments.
"Georgism," as it's now called, may sound downright Marxist to contemporary ears. But economists argue that a land-value tax is more efficient than income or sales taxes because it doesn't reduce productivity. Adam Smith advocated for a land-value tax in The Wealth of Nations. And Milton Friedman, certainly nobody's idea of a commie pinko, called it the "least bad tax" that government can impose.
Ironically, Monopoly's "income" tax — 10% of your assets, capped at $200 — isn't an income tax at all. It's a wealth tax. And it takes the exact opposite approach of the President occupying the White House at the time the game debuted. The Revenue Act of 1935 applied a special 75% rate on income above $5 million, although just one lucky winner — Standard Oil heir John D. Rockefeller, Jr. — actually paid it.
(As high as Roosevelt's depression-era taxes sound to us today, he wanted to go even further after Pearl Harbor. He argued in 1942 that in a time of such grave national danger, "no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year (about $350,000 in today's dollars). Roosevelt's simple solution? A 100% top rate on anything above that amount!)
Today, of course, "Monopoly money" has become synonymous with worthless paper. And paying your taxes is about as fun as landing on Boardwalk, with a hotel! But paying less is no game. It takes careful work and planning. So call us when you're ready to play — do not pass Go! 

Tuesday, April 11, 2017

What Would You Do for a Klondike Bar?

In 1982, Unilever came up with a catchy jingle to sell Klondike bars, a sort of Eskimo pie without a stick: "What would you do for a Klondike Bar?" The challenges weren't especially grueling. Would you make monkey sounds? Act like a chicken? In one spot, a boneheaded dudebro actually listened to his wife talk (about painting the foyer yellow) for five seconds to get his hands on the creamy treat.

Now wallethub.com, a personal finance website, has updated the question, if not the actual jingle. But WalletHub doesn't care what you'd do for dessert. They surveyed 500 Americans to discover what you would do to avoid taxes. The answers might surprise you!

What would you do to avoid paying taxes for the rest of your life? 20% would get an "IRS" tattoo. 16% would move abroad. 10% would give up talking for six months. 4% would sell a kidney. And 2% would spend a year in jail!

Who do we like more than the IRS? Former President Barack Obama took home the gold with 56%, with Pope Francis bring home the silver at 50%. Justin Bieber got 15%, Kim Kardashian got 13%, and even OJ Simpson placed at 7%. (You've really got to detest the IRS to like OJ Simpson more!)

What would you rather do than prepare your taxes? 73% said laundry, 56% said cut the grass, and 50% said teach their children to budget. Ok, those sound easy enough — except maybe the "budget" part. But 40% said they'd rather change a baby's diaper, 30% would rather talk to their kids about sex, 12% would rather spend a night in the pokey, and 9% would rather break their arm!

Would you hide money offshore? 81% said no, even if they knew they wouldn't get caught. Of course, that leaves a full 19% we apparently need to look out for!

What scares you most about taxes? 32% said identity theft, which seems well-founded these days. 30% said making a math mistake. 20% feared not having enough money to pay. And 18% worried about getting audited. (The actual audit rate is sitting at a historic low of 1%.)
What's your favorite government institution? The Department of Veterans Affairs came in at number one, with the Department of Education, FBI, CIA, Federal Reserve, and White House all beating the IRS. Only Congress came in even lower.

GoBankingRates.com also asked a group of Americans what they would do to avoid taxes. 32% would stand up and perform five karaoke songs in front of their co-workers. 18% would go without wifi for a year, which wouldn't be much of a sacrifice to the 90% of humanity that lived before wifi was even a thing. 13% would gain 20 pounds, 11% would let their web browsing history be made public, and 6% were willing to smell like a skunk for six months!

Why go to the depths of such unpleasantness? We can't promise you a tax-free future, and tax prep won't ever be fun. But we can tell you it doesn't have to be as hard. You just need a plan to pay the minimum amount allowed. And that's where we come in. We promise it's easier to sit down with us than it is to waste money on taxes you don't have to pay!