Monday, March 28, 2011

Google's Tasty Tax-Free Sandwich Twenty years ago, "googol" was an obscure math concept — the number one followed by a hundred zeros. Today, Google the company is the world's leader in online search, "cloud" computing, and advertising. Google recruits top computer talent to fuel growth. And that brainpower pays off — Google earned $10.8 billion in 2010 alone. With that sort of income in play, it shouldn't surprise you that Google recruits top tax talent, too. And that tax brainpower has paid off too. While Google is subject to a 35% corporate tax rate here in the U.S. (the world's highest), they actually pay just 22%. Their overseas tax rate is even lower — just 2.4%, despite operating mostly in high-tax countries with average corporate rates topping 20%. How does Google do it? They use a series of strategies with colorful names like "Double Irish" and "Dutch Sandwich" that shift income out of the United States and Europe into sunny island havens with no tax at all. See if you can follow how it works: 1.Google licenses the rights to its various intellectual properties to a company called Google Irish Holdings. (Don't go looking for them in Ireland — they're actually headquartered in tax-free Bermuda.) 2.Google Irish Holdings in turn owns a subsidiary called Google Ireland Limited — a "real" company with 2,000 employees located in Dublin that sells advertising worldwide. 3.Google Ireland Limited earns billions in revenues subject to Ireland's 12.5% corporate tax rate. Better than paying 35% in the U.S., right? But Google doesn't even want to pay that, so they send nearly all of those billions back to Google Ireland Holdings. Bottom line: the Double Irish lets Google stick the Irish subsidiary with all the expenses of earning income while shifting the income itself to Bermuda. "But wait!" you're probably thinking right now. Doesn't Ireland impose withholding taxes on transfers outside Ireland? No problem — just send payments from the Dublin entity through Google Netherlands Holdings, B.V., an Amsterdam firm with no employees that takes advantage of European Union rules to avoid Irish withholding. Detouring the money through Amsterdam creates the "Dutch Sandwich" part of the deal and saves a tasty billion in taxes every year. Strategies like the Double Irish and Dutch Sandwich aren't illegal. Companies like Microsoft, Oracle, Pfizer, and Eli Lilly all use the Double Irish. They aren't even new — back in the 1970s, Hollywood movie studios and even individual actors used a version of the Dutch Sandwich to avoid millions in taxes. Back in 2009, Treasury officials proposed new taxes on transfer payments between foreign subsidiaries, which they estimated would raise $86.5 billion in new revenue in the first decade. Then they invited corporate taxpayers to comment on the proposed rules. (I know, sort of like inviting Charlie Sheen to help you host an intervention.) Not surprisingly, the Treasury wound up dropping the proposal, although the White House continues to call for new rules on transfer pricing. The Double Irish Dutch Sandwich certainly isn't for individuals like us. But don't let that stop you from planning to keep your taxes as low as possible. And remember, we're here for your friends, family, and colleagues too!

Monday, March 21, 2011

Uncle Sam, Bookie?
It's March Madness, and the NCAA Men's Basketball Tournament is in full gear. It seems like half of America has joined a pool, whether they play it safe with #1 seeds or try to guess the upsets. Even President Obama has joined the fun. In fact, he's doing pretty well, going 10 for 16 on Sweet Sixteen picks, ranking at the 99%th percentile on ESPN.com, and leading a pool of lawmakers collected by online reporters at TheHill.com.
If you win your local pool, and pocket a nice prize for your picks, you might find yourself with an unexpected partner in success. That's right, the IRS will certainly want their share. But what happens if you lose? Will Uncle Sam be there to ease the sting?
If you place bets with a bookie, in Las Vegas or elsewhere, you generally "lay 11 to win 10." The bookie collects a 10% commission, or "vigorish," for their service. As long as they attract an equal amount of action on each side of a game, they guarantee to come out ahead no matter who wins.
The IRS isn't quite so fortunate. But they still come out ahead with a tax code version of "heads we win, tails we don't lose." Here's how it works:
If you win, you report your winnings as taxable income on Form 1040, Line 21. All of them.
If you lose, you can deduct your losses as a miscellaneous itemized deduction on Schedule A, Line 28. Gambling losses aren't subject to the usual 2% floor of adjusted gross income. But, you can do it only if you itemize deductions. That knocks out about 2/3rds of all taxpayers right there. And you can only deduct them up to whatever winnings you report.
The final score is this: if you win, Uncle Sam is happy to help you celebrate. But if you lose, you lose alone!
The IRS is all about making it easier for you to report your income, and gambling winnings are no exception. Generally, if you win $600 or more at the track, $1,200 at the slots or bingo, or $1,500 or more at keno, the payer has to issue a W2-G reporting your good fortune — and withhold 25% of the loot! And poker tournament sponsors now have to report players' winnings over $5,000.
Reporting losses is a bit harder — the IRS requires you to keep "an accurate diary or similar record" containing at least the following information: the date and type of specific wager, the name and address or location of the gambling establishment, the names of other persons present with you at the gambling establishment, and the amount(s) you won or lost. Ouch! (Yes, you can deduct what you paid to enter your pool — and fortunately, you don't have to tell the IRS if you picked Princeton to win it all!)
We talk a lot in these emails about tax planning. And obviously, when you make a bet or enter a pool, you don't plan to lose. But just because you don't plan it doesn't mean we can't help you with it. So remember to call us with all your tax questions, and good luck with your picks!

Monday, March 7, 2011

Tax Strategies for Charlie Sheen

Sitcom star Charlie Sheen's public meltdown has grabbed more headlines than any story since pop star Michael Jackson's death. Public consensus is that Sheen is a man in desperate need of help. So naturally, we were wondering, is there any help waiting for him from the IRS?
We're not here to "pile on" like so many commentators. (That's what Saturday Night Live is for!) But if you're following the story like so many of us, consider how the tax code helps Charlie in these areas:
Drug Rehab. Charlie's rehab bills are a deductible medical expense. And unlike some deductions that are specifically limited (like mortgage interest on your primary residence and just one additional home), there's no limit to how many times you can write off rehab.
The downside here is that medical expenses are deductible only to the extent they exceed 7.5% of "adjusted gross income." Sheen reportedly makes $1.8 million for each of 22 episodes, which suggests he can only deduct medical expenses topping $3 million/year. Even for Charlie, that might be a stetch! However, he might establish a Medical Expense Reimbursement Plan through a business entity to avoid that 7.5% floor. If you own your own business, even a startup or sideline, call us to see if you can benefit from that same strategy.
"Goddesses." Sheen lives with two young blondes whom he calls "goddesses," and whom he says help take care of his twin toddler sons. If he actually pays those women for child care, payments up to $6,000 per child may qualify for the Dependent Care Credit. The rules say you can't pay a member of your own family to care for younger children — but they don't say anything about paying goddesses!
Job-Hunting Expenses. Producers of Sheen's hit comedy "Two and a Half Men" have shut down production for the rest of this season and appear ready to replace Sheen going forward. Job hunting expenses to help Sheen find new artistically challenging roles are deductible as a miscellaneous itemized deductions, subject to a 2% floor on adjusted gross income.
Legal Fees. Odds are good that anyone with a mouth like Charlie needs a lawyer who bills by the hour. Sheen can deduct legal fees relating to the $300 million lawsuit he just announced against CBS, along with any additional fees related to tax-deductible alimony paid to his three ex-wives.
Sheen has tiger blood and Adonis DNA to help him through his current troubles. But even Hollywood train wrecks can't hide from taxes without a plan. So call us if you're looking for savings without the headlines!

Wednesday, March 2, 2011

Dressing for Success

Sunday was Oscar Night, Hollywood's annual exercise in self-indulgence, when stars don their most formal evening wear to parade a red carpet in broad daylight. This year's nominees went home with "swag bags" worth a record $100,000 — taxable, of course. But you don't have to be a Hollywood celebrity to land in tax trouble for keeping up appearances, as a recent Tax Court case showed.

Anietra Hamper worked as a morning and noon news anchor for WBNS-TV in Columbus, Ohio. (You know the type — perky, poised, blonde, blow-dried.) The network required her to maintain a specified professional appearance as described in the station's Women's Wardrobe Guidelines — specifically, "'standard business wear,' typical of that which one might wear on any business day in a normal office setting anywhere in the USA." The guidelines didn't call for spending a lot to comply — in fact, they stated that off-the-rack outfits would generally be more appropriate than excessively stylish designer wear. They also required her to maintain her hair in a neat and professional cut and maintain her fingernails at a reasonable length, finished with conservatively colored nail polish.

Hamper apparently saw the network's rules as more than just "guidelines." She saw them as a green light to shop till she dropped — and deducted it all, too! From 2005 through 2009, she claimed a boutique-busting $83,678 in un-reimbursed employee business expenses for traditional business suits, lounge wear, a robe, sportswear, active wear, lingerie, cotton bikini and cotton thong underwear, and evening wear. She also wrote off expenses for an Ohio State jersey, jewelry, bedding, running and walking shoes, and dry cleaning costs. She literally shopped all over town, from Nordstrom’s to Old Navy and everywhere in between.

And Hamper deducted more than just her wardrobe, too. She wrote off special contact lenses she claimed she needed for reading the teleprompter (along with contact lens solution, of course), Softsoap "Morning Mist" pump soap, haircuts, manicures, teeth whiteners, and skin-care products! She deducted her subscriptions to cable television, the internet, satellite radio, and magazines such as Cosmopolitan and Glamour. She even deducted a gym membership which she said she used for self-defense classes to protect herself from stalkers.

Hamper reported she wore the business clothes only at work and maintained her business wardrobe separate from her personal wardrobe. She claimed the requirement to wear "conservative" clothing made her business clothing unsuitable for everyday wear. Unfortunately for her, the IRS says nothing about "conservative" clothing being unsuitable, and holds that when business clothes are suitable for general wear, they're not deductible. (An Ohio State Buckeyes jersey, not suitable for general wear? Really? Maybe if she were working in Ann Arbor, Michigan — but not Columbus, Ohio!) So the IRS denied nearly all her deductions and slapped her with over $3,000 in accuracy-related penalties for good measure. Last week, the Tax Court upheld the IRS, scripting an end to Hamper's story that she can't be happy to report.

Fernando Lamas famously said "it is better to look good than to feel good." Well, whether or not the IRS agrees, they certainly don't think Uncle Sam should pay for it! Call us if you're faced with a deductibility dilemma, and we'll at least get you feeling good about dressing for success!