Monday, October 31, 2016

Hut, Hut, Hike! (Your Tax Bill)

The 2016 NFL season is in full swing, and fans are spending billions of dollars to show their loyalty to their teams. The average ticket costs $92.98. The average beer runs $7.38. Even parking can cost as much as $75 to see the Cowboys at AT&T Stadium. And fans spend billions more on licensed hats, jerseys, jackets, and other apparel.
But teams don't always return that loyalty. In recent years, the Cleveland Browns became the Baltimore Ravens, the Houston Oilers became the Tennessee Titans, and the St. Louis Rams, who had previously been the Los Angeles Rams, scampered back to LA. In most cases, teams make lateral moves to new hometowns to find better stadium deals. These days, a 10-year-old stadium is about as exciting as a quarterback with a torn hamstring.
Now the Oakland Raiders — who started out in Oakland before moving to Los Angeles before moving back to Oakland — are hoping to move again, this time to Las Vegas. Once again, a new stadium is the big incentive. So let's take a look at the role taxes will play in the move.
A top-notch quarterback can cost north of $20 million per year. But a top-notch stadium costs closer to two billion. That's a lot for an NFL owner to swallow, even with the average team worth $2.43 billion. So it's customary for owners to approach their civic hosts with tin cups outstretched, looking for help to foot the bill. And taxpayers are usually happy to help — over the last 20 years, state and local governments have ponied up nearly half the cost of building or renovating stadiums for the league's 32 teams.
Here's what's happening in Vegas. Raiders owner Mark Davis says he's willing to throw $500 million towards a proposed $1.9 billion, 65,000-seat domed stadium. Casino owner Sheldon Adelson is willing to to hand off $650 million more. Nevada Governor Brian Sandoval has signed a bill hiking hotel taxes by 0.88% to cover the remaining $750 million. The plan also involves accelerating $899 million in transportation improvements already on the drawing board. Will all that spending turn out to be a smart bet?
At least the Las Vegas plan involves tackling visitors for the tax money. (Hotel taxes are especially popular sources for stadium revenue.) But sometimes public financing leads to a complete fumble. St. Louis dropped $259 million on the Edward Jones Dome to lure the Rams from LA, financing it with 30-year bonds. The team stayed for 21 years before sacking St. Louis to return to California. Now St. Louis taxpayers are stuck paying $12 million per year for a football stadium with no football team in it. It's going to take a lot of tractor pulls to cover that bill.
Team owners and their lobbyists argue that shiny new stadiums pay for themselves in the form of jobs, spending, and sales taxes. But study after study shows that's rarely true. Ultimately, it comes down to supply and demand. There are only 32 teams in the league, but there are far more cities that want one. Politicians can promise until they're blue in the face that they won't raise taxes. But what elected official wants to face his voters after letting a greedy owner strip their team from their town?
We realize that your game plan probably doesn't involve paying more tax to finance a stadium. In fact, it probably involves paying less. That's where we come in. So hand us the ball and let us take it up the field for you. We're confident you'll cheer for the savings. And remember, we're here for all your teammates, too! 

Monday, October 24, 2016

Warren Buffett's Real Superpower

Spend an afternoon at any area theater, and you'll see heroes with superpowers wreaking havoc wherever they go. Superman is faster than a speeding bullet (and leaps tall buildings in a single bound). Superheroes band together to save the world and debate whether they can ignore civilian authorities while they do it. Sometimes they even get married — just witness the Incredibles, an entire family of "Supers" dedicated to battling evil on a daily basis.

Every so often, mere mortals reveal they have superpowers, too. Take Warren Buffett, the "Oracle of Omaha." The longtime chairman of Berkshire Hathaway has grown his company's book value by 19.7% per year for the last 49 years, making him the third-richest man in the world. Most observers would say Buffett's superpower is his talent for spotting undervalued companies to buy. But is stock picking really the ace up his sleeve? Or could his true superpower be tax planning?

Here's what's going on. Most public companies start out by plowing their profits back into their own growth. At some point they become confident enough to reward investors with cash dividends. The typical S&P 500 company pays out about 30% of its earnings to shareholders for a 2% dividend yield. Those dividends encourage more investors to buy in. But they're taxable as soon as paid, and slow a company's growth, too.

Buffett plays a little tighter. He looks for undervalued targets with rich cash flows and solid dividend histories. He buys them, then kills their dividends to redeploy that cash for future acquisitions. Buffett's own company hasn't paid a dividend since Lyndon Johnson was president!

Buffett owns $65 billion worth of his company's stock. If he paid a 2% dividend like the typical S&P 500 company, he would have taken $1.2 billion last year, meaning a $280 million tax bill. Plowing those millions in tax savings back into his company's growth adds even more to Buffett's net worth! (What would Buffett do with all that income, anyway? He's famously modest, still living in the same Omaha house he bought for $31,500 back in 1958. And when he bought a private jet, he had the self-awareness to name it "the Indefensible.")

But wait . . . there's more! Buffett isn't just avoiding tax on dividends. By locking up all his income inside the business and rewarding investors in the form of higher share prices, he's converting ordinary income into capital gains. That means that shareholders who hold their stock until death will qualify for "stepped-up basis" treatment and escape tax on their gains entirely.

Of course, all those billions are still subject to estate tax. But Buffett has a plan for that, too. He's a legendarily generous philanthropist who's pledged to donate 99% of what's left at his death to his friend Bill Gates's (tax-free) foundation. So the untaxed billions he's squirreled away will escape the IRS forever. Now that's a superpower! Buffet's planning has worked so well that Hillary Clinton has even named a campaign proposal after him: the "Buffett Rule," which would set a minimum tax rate of 30% on anyone earning over $1 million per year.

We can't promise that saving taxes will compound your dividends into billions. But it's just common sense that keeping more for yourself contributes to your bottom line. So call us if you want to borrow a little of Buffett's superpower for yourself!

Tuesday, October 18, 2016

We're Number One!

Americans love awards shows — the Oscars, the Grammys, the Emmys, and the Tonys. So we all watched eagerly as the nonpartisan Tax Foundation rolled out the red carpet and released "International Tax Competitiveness Index 2016." The ranking rewards countries with low marginal rates to discourage businesses from fleeing abroad and simple systems to raise the most revenue with the fewest "economic distortions."
Which of the 35 member states of the Organisation for Economic Co-operation and Development (OECD) took home the gold? Was it our own United States? Maybe some sunny Caribbean tax haven where international gangsters travel to sip Pina Coladas and light cigars with their money? Perhaps one of those dinky European "Grand Duchies" tucked away in the Alps with strict bank secrecy laws?
No, no, and no. The winner, for a third year in a row, is the polka-dancing, wife-carrying, ice-yachting land of — Estonia! That's right, the Baltic country of just 1.3 million people, that most Americans couldn't find on a map, has the most competitive tax system in the world. Surprised?
What makes tiny Estonia's tax code so mighty? Try a 20% flat tax on earned income — the lowest top rate in the world. A 20% corporate rate with no tax on reinvested profits or double taxation of dividends. Property taxes based solely on land values, not buildings or improvements. A 20% value-added tax. And no taxes on foreign earned income, estates, or financial transactions.
Beyond Estonia, who are the top scorers? According to the ITCI:
  • Silver medalist New Zealand has "a relatively flat, low-rate income tax that also exempts capital gains (with a combined top rate of 33%), a well-structured property tax, and a broad-based value-added tax."
  • Estonia's neighbor Latvia, at #3, "has a relatively low corporate tax rate of 15%, speedy cost recovery, and a flat individual income tax."
  • Fourth-ranked Switzerland has "a relatively low corporate tax rate (21.1%), a broad-based consumption tax, and a relatively flat income tax that exempts capital gains."
  • Even socialist punching bag Sweden, which rounds out the top five, has "a lower than average corporate income tax rate of 22%, no estate or wealth taxes, and a well-structured value-added tax and individual income tax." Where does our internal revenue code fall on this international ranking? Well, it turns out, "we're number 31!" (What kind of medal do you get for 31st place, anyway, Styrofoam?) Among other demerits, we have the highest marginal corporate tax rate and some of the most complicated taxes out of the entire OECD.
    Our tax code may not impress our fellow nations, but that doesn't mean all hope is lost. It just means you have to plan a little harder to avoid paying more than your fair share. That's where we come in. So call us for help, and start thinking where in the world you want to take your savings!
  • Monday, October 10, 2016

    Will It Blend?

    If you've spent any time on the internet, you know it's a vast rabbit hole of places to waste precious minutes of your life. "Will it Blend" is one of those places, a video series showing off the Blendtec line of blenders. The videos feature the company's founder, smiling in a white lab coat and safety goggles, dropping the day's experiment into one of his company's appliances. Not surprisingly, avocados, credit cards, and an Big Mac Extra-Value meal all blend just fine — but iPhones, golf clubs, and an English-German dictionary on CD-ROM don't fare nearly so well. ("Don't try this at home," they warn.)

    Taxpayers play a similar game. It's not as fun to watch as a Justin Bieber doll in a blender, but it's potentially far more profitable. That game, of course, is "Will it Deduct?" The results don't go viral in the same way as the "Will it Blend?" videos. But they do wind up on the internet, in the form of Tax Court opinions.

    This week's "Will it Deduct" story features Herbie Vest, a CPA who launched an investment advisory firm for fellow CPAs. He took the company public and stayed on until 2001, when he sold out to Wells Fargo for $125 million. By that point, he found himself looking for a new challenge in life. He found it in his own past. When Vest was just two years old, his father was found hanging in the bathroom of his Texas shop. Investigators ruled it a suicide. But in 2003, he received an anonymous letter alleging murder. So Vest began investigating this coldest of cases.

    Vest spent $6.4 million, pursuing the case as doggedly as any fictional detective. In 2007, he tried to salvage that effort with a book or movie, hiring a writer to tell his story and a PR firm to market it. But Vest never found a killer, and the story never found a buyer.

    You can probably guess what Vest did with his pile of bills. That's right, he played "Will it Deduct?" The IRS pureed his claim on the grounds that he hadn't embarked on his effort for profit. So he applied for a do-over and took his case to the Tax Court. Last week, the Court released its opinion. Would Vest's deduction fare better than a toilet plunger in a blender? Here's what the judge said:

        "By January 2008 [Vest] had been investigating his father's death for five years. As of that time, his investigative activities had not generated a single dollar of revenue. Those activities generated no income during 2008, 2009, or 2010, and [Vest] had no reasonable prospect of generating future income. Petitioner never developed a business plan for commercializing his father's story. He has no professional background in writing, book publishing, or media. He did not modify the scale or scope of his investigative activities during 2008-2010 in an effort to minimize the substantial losses he was incurring."

    Sadly for Vest, his investigation did not deduct, and now he owes the IRS $4 million in tax.

    Don't let Vest's disappointment stop you from playing "Will it Deduct." Section One of the tax code imposes a tax on every taxpayer and sets forth the various rates. Think of it as a "red light" on the road to financial independence. But the rest of the code outlines hundreds of exceptions to that tax — the deductions, credits, loopholes, and strategies that give a "green light" for taxpayers to pulse, chop, and liquefy their tax bills. So call us to take advantage of those green lights. And remember, we're here for your family, friends, and colleagues too!

    Tuesday, October 4, 2016

    Round 'em Up and Shake 'em Down

    Last month, Hollywood brought back the classic western with a remake of The Magnificent Seven. It's a tale as old as the West itself. An evil land baron terrorizes a town to satisfy his insatiable greed . . . and a ragtag squad of outlaws rides in to the rescue.


    You might be surprised to learn that the IRS has its own elite posse, too. They ride into battle wearing wool suits and skirts instead of leather chaps, brandishing subpoenas instead of six-shooters. They're the brave men and women of the Global High Wealth Industry Group.


    The "Wealth Squad," as they're known, is dedicated to battling tax evasion in the face of two growing trends, the rich getting richer and taxes getting more complicated. The IRS has always dedicated its most capable auditors to its most complicated cases. But those auditors tend to work in their own little bubbles — partnerships, corporations, estates, etc.


    The Wealth Squad is a horse of a different color — an interdisciplinary group dedicated to "enterprise cases," where they look at taxpayers plus the businesses, trusts, foundations, and other entities they control. One accountant quoted in Bloomberg magazine described them like this: "highly capable, experienced examination specialists, which include technical advisers to provide industry or issue-specialized tax expertise, specialists regarding flow-through entities (such as trusts, partnerships, LLCs), international examiners, economists to identify economic trends within returns, valuation experts and others."


    Got a private jet? How about a private foundation? The Wealth Squad is especially interested in those.


    How does the Wealth Squad do it? With a deceptively powerful weapon: the Information Document Request, or IDR. Those requests start with your business and personal returns for the year in question, and get more intrusive from there. Imagine finding yourself on the business end of this summons:


        "Provide complete copies of all financial statements and method of accounting used to compile them, net worth computations, or other financial data probative of your assets, liabilities, net worth, income and losses, and cash flows from all sources, within and without the United States, including all underlying documents and any exhibits associated therewith, and if not apparent, please identify the preparer of such documents."


    Yikes. Someone's going to bill a lot of hours complying with that request!


    How much money are we really talking here? For the 2013 tax year, the IRS audited 1.5% of all tax returns reporting income from $200,000-399,999, and dug up $605 in additional tax for every hour they worked. That sounds like a pretty solid return on investment, until you look at what those auditors do with the "one-percenters" making real money. That same year, the IRS examined 12.1% of the returns boasting income of $5 million or more, and brought in a much-more-gratifying $4,545 for every hour invested.


    If there's any good news here, it's that unless you're a billionaire, you're probably not going to find yourself in the Wealth Squad's crosshairs. But that doesn't mean you don't deserve the same sort of proactive planning as their targets take for granted. So let us be your heroes on horseback who help you pay less!