Most of us like to eat, even if we choose to deny ourselves this pleasure from time to time. And those of us with an entrepreneurial bent often dream of opening a restaurant. Sometimes it's a bustling cafe fronting a busy urban sidewalk. Sometimes it's comfort food served on a rural byway. And when the dream works, it really is a dream. Just ask celebrity restaurateurs like Vanity Fair editor Graydon Carter, proprietor of Greenwich Village's Waverly Inn, or Hollywood legend Clint Eastwood, whose Mission Ranch eatery draws diners and fans to Carmel, California.
Unfortunately, opening a restaurant is one of those adventures that all too often ends in disaster. Sure, FEMA may monitor Waffle House closings as a measure of hurricane intensity. But restaurants are notoriously difficult businesses to run. CNBC reports that about 60% of new restaurants fail in the first year, and nearly 80% close before their fifth year, mostly due to being in the wrong location. So if you're hoping to launch the next food empire, or just cash in on the next food craze (cupcake ATMs, anyone?) it behooves you to spend as carefully as you can — including serving the IRS as little in tax as possible.
Jon Field, his twin brother Joel Field, Eric Schilder, and Paul Butler ran a group of restaurants called Cadillac Ranch, an American-themed eatery paying homage to the classic Route 66 which once wound its way through 2,448 miles of countryside "from Chicago to LA." The group naturally deducted the usual expenses you would expect from a restaurant business, like food, labor, and rent on their store locations. But that didn't seem to be quite enough for their taste, so they started looking for more.
Internal Revenue Code Section 162 states, "There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business." That's a pretty broad standard, right? You know what they say, one man's "tax avoidance scheme" is another man's "ordinary and necessary." (Who decides in the end? Lawyers, of course.)
So, our plucky restaurateurs decided to stretch the definition of "ordinary and necessary" to include things like personal cars, car insurance, country club dues, and personal credit card charges. One of them used company money to pay his lawn service, home maintenance and repairs, TV and audio systems, and even new granite countertops! (Maybe he thought he could test new recipes in his home kitchen?) They even got their CPA to buy in to the scheme — over a five-year period, he helped his clients burgle $191,000 from the U.S. Treasury.
Sadly, even the tastiest restaurant fads must someday come to an end. When was the last time you saw an actual cupcake ATM? (Mexican food was never just a fad — we're pretty sure the right to tacos is enshrined somewhere in the Constitution.) Although the IRS Criminal Investigation unit opens only about 4,000 cases per year, the Cadillac Ranch made that cut. The Field brothers and the CPA all wound up sentenced to spend time as guests of the federal government, in facilities where the staff proudly dish out mystery meat three meals a day and frown when you ask to substitute a side salad for those high-carb french fries.
Fortunately, there's a better way, at least for you. The tax code offers all sorts of creative recipes for arranging your affairs to pay the least tax possible. That's where we come in. Let's see if we can sit down and cook up a plan for you. And don't forget to leave room for dessert!
Tuesday, September 26, 2017
Tuesday, September 19, 2017
Sink Your Teeth Into This One
"You better cut the pizza in four pieces because I'm not hungry enough to eat six."
Yogi Berra
The calendar is full of little-known commemorations that probably escape your attention, and this month is no exception. Some of them are just silly, like September 19's International Talk Like a Pirate Day. (Although, really, if you don't think pirates are cool, what's wrong with you?) Some are obscure, like September 23's Restless Leg Awareness Day. But some of those special days resonate with everyone. And that brings us to September 20: Pepperoni Pizza Day. Yes, it's really a thing, and yes, it's magnifico!
Just about everyone loves pepperoni pizza. Even vegans can enjoy it with dairy-free cheese and meatless pepperoni substitutes. (Don't mock it until you've tried it!) Americans eat over 100 acres of pizza per day, and 36% of those pies have pepperoni on top. We eat over 250 million pounds of pepperoni on our pizza every year. Naturally, tax collectors love it . . . so let's see how they take their slice or two of the pie.
Pizza is a $44 billion industry here in the U.S. The top 50 chains, led by Pizza Hut, Domino's, Little Caesars, and Papa John's, account for $24.75 billion in sales. Smaller chains and independents gross $19.75 billion more. That means billions in sales taxes going to state and local governments, billions in corporate income taxes from the companies that sell those pizzas, and billions in personal income taxes from the actual people who own those businesses.
There are 76,723 pizzerias in America. Every one of those parlors pays property tax on the location. It would be poetic if New York-style pizzerias everywhere paid tribute to New York and deep-dish pizzerias nationwide kicked up to Chicago, but cross-state tax compacts aren't quite so flexible.
Fortunately, taxes on pizza aren't all "takeout." Every one of those gooey delicious pies starts with raw ingredients like wheat flour, tomato sauce, cheese, and meat. Our tax code offers some savory tax breaks to the farmers who supply those ingredients. Pork producers, for example, get depreciation deductions for farm equipment and confinement facilities to turn three-pound piglets into 275-pound hogs in just six months. That's a lot of pepperoni!
Does all this pizza talk have you thinking about opening your own place? Watch out for audits! Pizzerias are largely cash businesses, which makes it easy to skim off profits. In the early 1990s, the IRS conducted an in-depth study of mom-and-pop pizzerias in the Providence, RI area and wrote an entire guide for auditors examining them. If you're under audit, and the examiner suspects you're underreporting your sales, he might contact your meat supplier to see how much pepperoni you bought, then compare it to the pizza sales you report. If the numbers don't add up, you'll have some 'splainin to do!
Finally, don't be fooled by places serving "flatbreads." It's pizza. They just call it flatbread to charge more.
We realize there's no easy way to transition from pepperoni pizza to tax planning. But there is a connection. The less you pay in tax, the more dough you'll have to enjoy America's favorite comfort food! So come to us before you get hungry, and let's see how much more of your income "pie" you can actually eat!
Monday, September 11, 2017
Help With Help
Ordinarily we use this space for lighthearted stories that poke fun at the tax system and some of the clever ways that people endeavor to make it work for them, successfully or not. But the recent stories coming out of Harvey-ravaged Texas and Irma-ravaged Florida suggest a more serious tone for a change. Today we're going to walk through some tax-related opportunities when it comes to reaching out to storm victims. You might be surprised to see how our friends at the IRS are jumping in to help, too:
If you want to deduct your contributions, make sure you're giving to a properly registered 501(c)(3) nonprofit. There are more than 1.5 million of them, and many are making extra efforts to help storm victims. These include local groups in affected areas, faith-based groups, and even animal-welfare groups dedicated to rescuing pets displaced by the storms. Many national groups have established special funds for Hurricanes Harvey and Irma, which let you earmark your contributions.
Be careful before you join crowdfunding efforts on sites like GoFundMe. While you can certainly find links to registered 501(c)(3) organizations, most individual campaigns won't qualify for tax deductions.
Don't be afraid to do some homework on a charity before you give. Check out rating sites like Charity Navigator and Charity Watch, which can tell you how much of your donation your chosen group gobbles up in administrative expenses, and whether they submit their financials to an independent accountant for audit.
There's no deduction for the value of time you volunteer for cleanup efforts and other relief. However, you can deduct any expenses you pay, such as for travel to an affected area. You can deduct 14 cents/mile driven in service of a charitable organization.
If you don't itemize deductions, consider asking your employer to donate the cash value of your unused vacation time, personal days, or sick leave to charitable organizations. Your tax break will take the form of not recognizing that income in the first place. (Your employer gets the same deduction they would have taken if they had paid it out in compensation.) IRS Notice 2017-48 sets out the rules for you and your employer.
The IRS has a web page discussing help for victims of Hurricane Harvey, and we can assume it won't be long before they update it for Irma (and possibly Jose, which at this writing could still hit somewhere on the east coast.) You'll find extended due dates for business returns, penalty waivers, and special provisions letting retirement plans expedite loans and hardship distributions to hurricane victims and their families.
We realize that saving a few bucks on taxes may be the last thing on your mind when you see the devastation Mother Nature has wrought. But those tax breaks serve a purpose, to encourage giving and to help you give more. So don't overlook these opportunities to save. And call us with your questions — coming together as communities is how Americans support each other in times of need, like now.
If you want to deduct your contributions, make sure you're giving to a properly registered 501(c)(3) nonprofit. There are more than 1.5 million of them, and many are making extra efforts to help storm victims. These include local groups in affected areas, faith-based groups, and even animal-welfare groups dedicated to rescuing pets displaced by the storms. Many national groups have established special funds for Hurricanes Harvey and Irma, which let you earmark your contributions.
Be careful before you join crowdfunding efforts on sites like GoFundMe. While you can certainly find links to registered 501(c)(3) organizations, most individual campaigns won't qualify for tax deductions.
Don't be afraid to do some homework on a charity before you give. Check out rating sites like Charity Navigator and Charity Watch, which can tell you how much of your donation your chosen group gobbles up in administrative expenses, and whether they submit their financials to an independent accountant for audit.
There's no deduction for the value of time you volunteer for cleanup efforts and other relief. However, you can deduct any expenses you pay, such as for travel to an affected area. You can deduct 14 cents/mile driven in service of a charitable organization.
If you don't itemize deductions, consider asking your employer to donate the cash value of your unused vacation time, personal days, or sick leave to charitable organizations. Your tax break will take the form of not recognizing that income in the first place. (Your employer gets the same deduction they would have taken if they had paid it out in compensation.) IRS Notice 2017-48 sets out the rules for you and your employer.
The IRS has a web page discussing help for victims of Hurricane Harvey, and we can assume it won't be long before they update it for Irma (and possibly Jose, which at this writing could still hit somewhere on the east coast.) You'll find extended due dates for business returns, penalty waivers, and special provisions letting retirement plans expedite loans and hardship distributions to hurricane victims and their families.
We realize that saving a few bucks on taxes may be the last thing on your mind when you see the devastation Mother Nature has wrought. But those tax breaks serve a purpose, to encourage giving and to help you give more. So don't overlook these opportunities to save. And call us with your questions — coming together as communities is how Americans support each other in times of need, like now.
Wednesday, September 6, 2017
$50 Million, Hut!
The 2017 college football season kicked off this week, and for most people that means talk of pre-season polls, Heisman trophy hopefuls, and BCS championship prospects. But we're not "most people," are we? So today we're going to ignore all that boring on-field action and see how one coach's financial advisors lined up the X's and O's to outwit the defensive line at the IRS.
Here's a little-known fact that might offend your sense of priorities. Seven-figure salaries are almost unheard of in academia. But the average major university's football coach makes $1.81 million per year. In fact, in 39 states, the highest-paid academic or public employee is a college football or basketball coach. (And how many of them do you think have performance bonuses tied to graduation rates?)
Alabama's Nick Saban would seem to top that list with over $7 million per year. And why not? He's rolled his Crimson Tide to four national championships in 10 years. But here's the problem, at least as far as his salary and performance bonuses are concerned. The linebackers at the IRS are out for their share, too. And they're not satisfied with a pick-six — they're looking to intercept over 40%.
It turns out that Saban's cross-country coaching rival, Michigan's Jim Harbaugh, found a clever pattern to weave around those defenders and come out on top where it really counts — after taxes. Here's how it works:
The university established a nonqualified deferred compensation plan with Harbaugh that took the form of "split-dollar" life insurance. (Split-dollar is simply a life insurance policy where the costs and benefits are shared by more than one party — typically, it's an employer and employee.)
The university agreed to make seven annual nontaxable loan advances of $2 million each for Harbaugh to use to buy a cash-value life insurance policy. Those premiums will grow to build a tax-free pool of assets while Harbaugh continues to coach the Wolverines.
Harbaugh can take nontaxable loans from the life insurance policy for supplemental retirement income so long as the remaining cash value in the policy is enough to repay the loan advances.
When Harbaugh dies, the university gets $14 million to cover the loan advances and Harbaugh's beneficiaries get the remaining death benefit. Harbaugh is a healthy 53 years old, which should leave a long time for that cash value to grow. Some experts estimate Harbaugh can run up that score to as much as $50 million.
Harbaugh won't pay any interest on the $14 million in loan advances. However, he will have to pay tax on the value of the foregone interest he would have paid, as calculated by IRS tables. But since that tax shouldn't top much more than $100,000 per year at current rates, that's an easy call to make!
Football teams have all sorts of ways to put points on the board: running plays, passing plays, options, sneaks, and even the time-tested fumblerooskie. The best coaches put together game plans to harness all those opportunities. It works the same way with taxes. So call us before you get to the red zone, and let us come up with your best game plan!
Here's a little-known fact that might offend your sense of priorities. Seven-figure salaries are almost unheard of in academia. But the average major university's football coach makes $1.81 million per year. In fact, in 39 states, the highest-paid academic or public employee is a college football or basketball coach. (And how many of them do you think have performance bonuses tied to graduation rates?)
Alabama's Nick Saban would seem to top that list with over $7 million per year. And why not? He's rolled his Crimson Tide to four national championships in 10 years. But here's the problem, at least as far as his salary and performance bonuses are concerned. The linebackers at the IRS are out for their share, too. And they're not satisfied with a pick-six — they're looking to intercept over 40%.
It turns out that Saban's cross-country coaching rival, Michigan's Jim Harbaugh, found a clever pattern to weave around those defenders and come out on top where it really counts — after taxes. Here's how it works:
The university established a nonqualified deferred compensation plan with Harbaugh that took the form of "split-dollar" life insurance. (Split-dollar is simply a life insurance policy where the costs and benefits are shared by more than one party — typically, it's an employer and employee.)
The university agreed to make seven annual nontaxable loan advances of $2 million each for Harbaugh to use to buy a cash-value life insurance policy. Those premiums will grow to build a tax-free pool of assets while Harbaugh continues to coach the Wolverines.
Harbaugh can take nontaxable loans from the life insurance policy for supplemental retirement income so long as the remaining cash value in the policy is enough to repay the loan advances.
When Harbaugh dies, the university gets $14 million to cover the loan advances and Harbaugh's beneficiaries get the remaining death benefit. Harbaugh is a healthy 53 years old, which should leave a long time for that cash value to grow. Some experts estimate Harbaugh can run up that score to as much as $50 million.
Harbaugh won't pay any interest on the $14 million in loan advances. However, he will have to pay tax on the value of the foregone interest he would have paid, as calculated by IRS tables. But since that tax shouldn't top much more than $100,000 per year at current rates, that's an easy call to make!
Football teams have all sorts of ways to put points on the board: running plays, passing plays, options, sneaks, and even the time-tested fumblerooskie. The best coaches put together game plans to harness all those opportunities. It works the same way with taxes. So call us before you get to the red zone, and let us come up with your best game plan!
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