Halloween is almost here, and if it seems like things have changed since you were a kid, you're right! Halloween has become big business, with the National Retail Federation predicting Americans will spend $9.1 billion on the festivities. That includes $3.4 billion on costumes, with top choices being superheroes, animals, princesses, witches, vampires, and zombies. And, "pets will not be left behind, with 10 percent of consumers dressing their pet as a pumpkin." (If you've got a dachshund, of course, you have to dress it up as a hot dog. Rule of law.)
Naturally, when the trick-or-treaters at the IRS hear the word "billions," they reach out for a "fun sized" treat, too. (Why do they call those dinky little candy bars "fun sized," anyway? What's fun about a bite-sized Snickers or Milky Way when you can score a full-size bar in the rich kids' neighborhoods?) Let's take a quick look at how the IRS taxes our favorite Halloween dopplegangers:
Superheroes who emigrate from other planets, like Superman (planet Krypton) and Thor (planet Asgard) are subject to U.S. tax on their domestic-source income. ("Resident alien" status doesn't distinguish between aliens from other countries and aliens from other planets.) Superheroes who meet the "green card" test or "substantial presence" test are taxed just like citizens on Form 1040. Those who don't meet either test file Form 1040NR.
Animals don't pay taxes. (Neither do princesses.) Come on, that's just silly.
Witches generally operate as sole proprietors, which means reporting income and expenses on Schedule C. If they sell potions along with casting spells, they'll include their eye of newt and toe of frog in "Cost of Goods Sold" in Part I, Line 4. IRS auditors understand that witches' travel expenses can be high because they live so deep in the forest. The good news is, witches can claim the same 53.5 cents/per mile allowance for travel by broom as the rest of us can claim for a full-size truck or SUV.
Vampires generally live for hundreds of years, which lets them really harness the power of tax-deferred compounding. At the same time, careful planning is required to manage drawdown strategies once required minimum distributions become a factor after age 70½.
Zombies pose especially frightening tax problems because they're not dead — they're undead. If Dad can't outrun a brain-eating horde and gets zombified, is he "deceased" for estate-tax purposes? If your spouse is zombified, can you still file jointly?
While we're on the topic of costumes, why don't kids ever dress up as IRS auditors? That would be scarier than anything else they can come up with. As for the grownups, can you imagine "sexy IRS auditor" costumes sitting on the shelf next to "sexy nurse," "sexy firefighter," and "sexy cop" outfits?
You probably never realized tax professionals could be so busy at Halloween! Fortunately, you don't have to work quite so hard yourself. Call us for a plan, and we'll teach you the tricks to keep as much of your treats as the law allows!
Tuesday, October 17, 2017
Tuesday, October 10, 2017
The Long and Short of It
Consumer surveys consistently show that CPAs are the most trusted financial advisors of all. But what happens in the rare instance when you can't trust your CPA? Nothing good, that's for sure!
Back in 2001, John Baldwin helped engineer a deal to sell Louisiana's Delta Downs racetrack for a $74 million profit. Baldwin took a $10 million fee for his work, along with some hefty interest payments on a $17 million loan his company had extended to finance it.
But Baldwin didn't want to share those hard-earned gains with the IRS. So he went to the "Big Four" global accounting firm of KPMG for ways to pay less tax. KPMG dug into their bag of tricks and pulled out a doozy — a "one-time fix" called SOS, or Short Options Strategy. Without getting too technical, here's how this little sleight-of-hand worked. (If you're thinking "sleight-of-hand" is an unfortunate term to use in the tax-planning context, you're right.)
First, Baldwin put up $1.5 million to buy $22 million worth of "long" options on Mexican and Brazilian currency, betting the value of the currency would go up.
Simultaneously, he sold $22 million worth of "short" options on the same currencies, betting the price would go down.
Next, he transferred the offsetting positions into a partnership and, relying on an old Tax Court opinion, calculated his "basis" in the partnership solely on the "long" position.
Finally, the partnership sold all the options for roughly what Baldwin paid for them and reported a tax loss in the vicinity of that long position — even though Baldwin was never at risk for losing anywhere near that much money.
If the whole thing smells like something that comes out of the south end of a north-facing horse, that's because it was. KPMG knew it was. The IRS caught on, of course. They audited everyone in sight, and socked Baldwin with over $10 million in tax, interest, and penalties. Prosecutors indicted KPMG and 19 individuals for helping Baldwin and 600 more clients evade $2.5 billion in taxes — and the firm paid $465 million in to make it all go away. Years later, some of those 600 customers are still battling KPMG in court.
And that brings us back to Baldwin, who sued KPMG for all sorts of nefarious-sounding offenses, like fraud, negligent representation, breach of fiduciary duty, and racketeering. Last month, the Third Circuit ruled that he really just should have known better: "the fact that a prearranged, 'turnkey' transaction could generate just the right amount of losses — for an 'investment' and fee orders of magnitude smaller — should have also seemed a serendipitous coincidence indeed." To add insult to injury, even KPMG says that Baldwin never should have trusted them in the first place!
Here's the good news. The tax code offers 70,000 pages of green lights to pay less tax legitimately. So don't be afraid to ask us to show our work, and cite those green lights — book, chapter, and verse. And call us before your big scores, so we can help you make the most of them!
Back in 2001, John Baldwin helped engineer a deal to sell Louisiana's Delta Downs racetrack for a $74 million profit. Baldwin took a $10 million fee for his work, along with some hefty interest payments on a $17 million loan his company had extended to finance it.
But Baldwin didn't want to share those hard-earned gains with the IRS. So he went to the "Big Four" global accounting firm of KPMG for ways to pay less tax. KPMG dug into their bag of tricks and pulled out a doozy — a "one-time fix" called SOS, or Short Options Strategy. Without getting too technical, here's how this little sleight-of-hand worked. (If you're thinking "sleight-of-hand" is an unfortunate term to use in the tax-planning context, you're right.)
First, Baldwin put up $1.5 million to buy $22 million worth of "long" options on Mexican and Brazilian currency, betting the value of the currency would go up.
Simultaneously, he sold $22 million worth of "short" options on the same currencies, betting the price would go down.
Next, he transferred the offsetting positions into a partnership and, relying on an old Tax Court opinion, calculated his "basis" in the partnership solely on the "long" position.
Finally, the partnership sold all the options for roughly what Baldwin paid for them and reported a tax loss in the vicinity of that long position — even though Baldwin was never at risk for losing anywhere near that much money.
If the whole thing smells like something that comes out of the south end of a north-facing horse, that's because it was. KPMG knew it was. The IRS caught on, of course. They audited everyone in sight, and socked Baldwin with over $10 million in tax, interest, and penalties. Prosecutors indicted KPMG and 19 individuals for helping Baldwin and 600 more clients evade $2.5 billion in taxes — and the firm paid $465 million in to make it all go away. Years later, some of those 600 customers are still battling KPMG in court.
And that brings us back to Baldwin, who sued KPMG for all sorts of nefarious-sounding offenses, like fraud, negligent representation, breach of fiduciary duty, and racketeering. Last month, the Third Circuit ruled that he really just should have known better: "the fact that a prearranged, 'turnkey' transaction could generate just the right amount of losses — for an 'investment' and fee orders of magnitude smaller — should have also seemed a serendipitous coincidence indeed." To add insult to injury, even KPMG says that Baldwin never should have trusted them in the first place!
Here's the good news. The tax code offers 70,000 pages of green lights to pay less tax legitimately. So don't be afraid to ask us to show our work, and cite those green lights — book, chapter, and verse. And call us before your big scores, so we can help you make the most of them!
Tuesday, October 3, 2017
They Hate Him at the IRS, Too
We live in an unfortunate era of disunity. Cultural divides, racial divides, religious divides, and political divides are threatening to tear America apart. Every so often, though, someone comes along to unite us all in a great primal scream of rage. Remember "Pharma bro" Martin Shkreli, who bought the company that manufactures the prescription Daraprim, then jacked the price from $13.50 to $750 per pill? We really do need more people like him to unite us against a common enemy.
Rick Smith probably never imagined his company would become one of those uniters. But up until last month, he was CEO of Equifax, the credit-reporting bureau that got hacked and waited six weeks to reveal it. By that time, intruders had made off with critically sensitive information on 143 million Americans. Was the hacker just some pimply Russian teenager living in his babushka's basement? An international gang of cyber-thieves? We may never know. But that 143 million figure certainly includes thousands of our friends at the IRS, who may not look kindly on the millions of dollars Smith earned leading up to the leak.
Smith's abrupt resignation means he'll walk away with only a pro-rated portion of his $1.45 million salary for 2017. He'll also lose his performance bonus, which could have been another $3 million. Of course, he would have paid the IRS 43.4% of those amounts anyway. But Smith can afford to shrug off losing the cash comp. That's because, like with most top executives at publicly-traded companies, the real action is in the stock. In fact, Smith has taken home 633,427 shares of Equifax stock, worth roughly $60 million, just since the start of 2016. Here's how it works:
203,427 of those shares came at no cost in the form of restricted stock awards or outright grants. Smith pays ordinary income tax on the fair market value at the time it's awarded.
He acquired the rest by exercising options at cost to him of about $15.4 million. He pays regular tax on the difference between that amount and fair market value at the time he exercises the options.
Because Smith "retired," rather than getting canned, he keeps his unvested options to buy millions more worth of shares over the next few years, just as if he were still working for the company.
No matter how Smith acquires his stock, he recognizes capital gain or loss when he sells. And he's not shy about selling — since 2016, he's unloaded 679,286 shares for a net gain of $68.9 million. That's nice timing, considering the stock has dropped by more than a third since the hack was revealed. It's cost Smith $13 million of his own fortune (sorry not sorry), and the rest of the company's shareholders, billions more.
Usually when CEOs leave unexpectedly, they put out a lame excuse like "leaving to spend more time with family." In Smith's case, that might actually be true — his family is going to need a lot of help recovering their stolen identities following the breach! But hey, let's be fair here — it's not like everyone in America hates him. The class-action lawyers must be drooling at the thought of suing his company into the ground.
Smith's story illustrates one of the most important lessons in tax planning. How you make your money is just as important as how much you make. So let us help you with a plan for making the most of your income — and hopefully you aren't hacking into anyone else's server to make it!
Rick Smith probably never imagined his company would become one of those uniters. But up until last month, he was CEO of Equifax, the credit-reporting bureau that got hacked and waited six weeks to reveal it. By that time, intruders had made off with critically sensitive information on 143 million Americans. Was the hacker just some pimply Russian teenager living in his babushka's basement? An international gang of cyber-thieves? We may never know. But that 143 million figure certainly includes thousands of our friends at the IRS, who may not look kindly on the millions of dollars Smith earned leading up to the leak.
Smith's abrupt resignation means he'll walk away with only a pro-rated portion of his $1.45 million salary for 2017. He'll also lose his performance bonus, which could have been another $3 million. Of course, he would have paid the IRS 43.4% of those amounts anyway. But Smith can afford to shrug off losing the cash comp. That's because, like with most top executives at publicly-traded companies, the real action is in the stock. In fact, Smith has taken home 633,427 shares of Equifax stock, worth roughly $60 million, just since the start of 2016. Here's how it works:
203,427 of those shares came at no cost in the form of restricted stock awards or outright grants. Smith pays ordinary income tax on the fair market value at the time it's awarded.
He acquired the rest by exercising options at cost to him of about $15.4 million. He pays regular tax on the difference between that amount and fair market value at the time he exercises the options.
Because Smith "retired," rather than getting canned, he keeps his unvested options to buy millions more worth of shares over the next few years, just as if he were still working for the company.
No matter how Smith acquires his stock, he recognizes capital gain or loss when he sells. And he's not shy about selling — since 2016, he's unloaded 679,286 shares for a net gain of $68.9 million. That's nice timing, considering the stock has dropped by more than a third since the hack was revealed. It's cost Smith $13 million of his own fortune (sorry not sorry), and the rest of the company's shareholders, billions more.
Usually when CEOs leave unexpectedly, they put out a lame excuse like "leaving to spend more time with family." In Smith's case, that might actually be true — his family is going to need a lot of help recovering their stolen identities following the breach! But hey, let's be fair here — it's not like everyone in America hates him. The class-action lawyers must be drooling at the thought of suing his company into the ground.
Smith's story illustrates one of the most important lessons in tax planning. How you make your money is just as important as how much you make. So let us help you with a plan for making the most of your income — and hopefully you aren't hacking into anyone else's server to make it!
Tuesday, September 26, 2017
Too Tasty for the IRS
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!
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 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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