Area Man Treats Colleague to Dinner, Drinks

The three-martini lunch has a long and mostly honorable history as a deductible business expense. As former President Gerald Ford once said, "Where else can you get an earful, a bellyful, and snootful at the same time?" Ford's successor, famed buzzkill Jimmy Carter, tried (and failed) to cut the deduction from 100% to 50%. The Tax Reform Act of 1986 succeeded in that goal, and today's business diner has probably switched from martinis to white wine. But old habits die hard — check any happening lunch spot and you'll find happy diners eating partly on Uncle Sam's dime.

The rapper-turned-mogul Jay-Z may have 99 problems, but reaching for the check isn't one. Last month, he treated the president of his Roc Nation Sports talent agency, Juan "OG" Perez, to an epic birthday night in Manhattan. The posse started with dinner at Zuma in midtown, where he dropped $13,000. After dinner, he took them uptown to Made in Mexico for $9,000 worth of drinks. And a group of six stragglers finished off the night at Playroom, where the real fun started.

Apparently, Jay-Z and his friends were very thirsty, very generous, or both. The group's bar tab — ticket #48 — included 20 bottles of Ace of Spades brand "gold" champagne at $1,200. Each. Plus 20 bottles of "rose" champagne at $2,500. Each. Plus $6,035 in sales tax (of course). Plus an $11,100 tip. Grand total, $91,135.00. Hear it for New York!

So . . . Jay-Z takes his employee out to dinner. Surely they talked business while they were painting the town. Should Jay-Z stuff his receipt in a shoebox to save for this year's tax return?

For starters, there's a debate brewing over whether business meals are now deductible at all. For 31 years, there was no debate that you could deduct 50% of meals where there was a substantial, bona fide business discussion. The Tax Cuts and Jobs Act clearly eliminates deductions for "associated entertainment" expenses, like golf or a ball game taking place before or after that business discussion. However, some tax professionals read the new law as eliminating the deduction for meals, too.

But even assuming the deduction survives the new law, there's another hurdle to overcome. Code Section 274(k) prohibits deductions "for the expense of any food or beverages unless such expense is not lavish or extravagant under the circumstances." Now, you can argue that if you're Jay-Z, you're expected to make it rain with $74,000 worth of champagne. And if you're talking a glass or two to celebrate signing a big deal, you might even be right. But we can probably assume that even Jay-Z's fans at the IRS would draw the line somewhere well before the 40th bottle.

As for that $11,100 tip . . . sure, it sounds like a baller move. But it's actually just 15% of the pre-tax tab, and pretty stingy for New York! Plenty of celebrities are known for being better tippers. Shaquille O'Neill asks servers to tell him how much they want. And George Clooney routinely leaves servers a 150% surprise. Walter White, of Breaking Bad fame, left a $100 tip for breakfast on his 52nd birthday, although it did turn out to be his last meal.

When was the last time you went out for a really special meal? Was it a birthday, an anniversary, or some other celebration? It probably wasn't deductible. But careful tax planning might keep enough in your pocket to cover your own epic night out. So call us when you're ready to save, and let's see if you can raise a glass of bubbly to the results!

This Will Make You Love the Income Tax . . .

We Americans have fought with our internal revenue code since 1913. But slicing and dicing income, deductions, and a dizzying array of business and personal credits is hardly the only way that Uncle Sam could raise the money he needs to pay for guns and butter. State and local governments also use sales taxes, payroll taxes, property taxes, excise taxes, and "gross receipts" taxes to fill their hungry coffers, too.

And then there are the more exotic taxes, the kind that sometimes live only in philosophers' heads. The nineteenth-century economist Henry George argued that a land-value tax would raise wages, improve land use, and eliminate taxes on economic activity. More recently, economists and politicians have proposed carbon taxes, consumption taxes, and European-style value-added tax alternatives.

Here's one you probably never considered. Earlier this month, a Duke University philosophy PhD candidate named Erick Sam took a microscope to the concept of an "endowment tax." This is a vaguely Marxist tax on "a person's potential earnings, which can provisionally be thought of as the maximum income a person could earn or could have earned over a given time period." (Yikes!)

Sam opens his paper by asking how we determine a person's "ability" in the first place. He acknowledges that we don't "inhabit a reality where endowment is readily apparent," then goes on to consider standardized test scores, genetic capabilities, and educational achievement as proxies for ability. He even mentions one proposal to impose a "privilege tax" based on the income your parents earned during your childhood!

Now the fun starts. Sam walks us through the utilitarian considerations of an endowment tax, and how it counters the "substitution effect" that income taxes impose on the desire to work. "Distributive considerations are only instrumentally relevant to this calculus, since different distributions will tend to be correlated with distinct aggregate utilities." (Well, duh???) He goes on to address the Kaplowvian argument for endowment taxation as the ideal Haigs-Simon income tax, where "income" equals consumption plus all accretions to wealth over a given period of time. (Huh?)

Next, he drags us kicking and screaming through a dense swamp of non-utilitarian considerations. These include Shaviro's deontological argument for endowment taxation rooted in the theory of luck egalitarianism, Stark's libertarian challenge to Rawlsian arguments favoring the priority of liberty, Markovits' algorithm for balancing endowment taxation with talent slavery, and Dworkin's auction and insurance scheme for eliminating inequality. (It's ok, we're just as lost as you are.)

After 69 pages, Sam thankfully suggests leaving the whole idea in one of the counter factual worlds where it might actually work. Here on Earth, though, endowment tax fans face three unpleasant choices: 1) make peace with how it does violence towards liberty, 2) acknowledge that it's both inefficient and unattractive on its own terms, or 3) accept its problems of "talent slavery, counter factual talent slavery, and servitude to objective standards of rationality." It's enough to make our current tax code sound pretty dreamy!

So . . . we've established that our current tax code may not be the worst way to raise government revenue. But that doesn't mean you have to like how much you pay! So call us when you're ready for some real-world savings, and we promise to explain them in actual English!

Romantic Tax Collectors Love Valentine's Day, Too

It's February, and love is in the air. Restaurants are advertising intimate specials for two. Florists are rolling out the red carpet. And in the greeting card racks across the country, Hallmark's most accomplished poets are debuting their new verse.

We're talking about Valentine's Day, of course. 62% of Americans say they'll celebrate the occasion. (Of course, that means the rest of us will just try to keep our heads down and pretend it's just another blah February day.) But with all those Cupid's arrows flying around, shouldn't the tax man get a little love, too?

The National Retail Federation estimates that Americans will spend $19.6 billion this Valentine's Day. That includes $4.7 billion on jewelry (for the truly lucky ones), $3.7 on going out, $2 billion on flowers (including, naturally, 250 million roses), $1.7 billion on chocolate and candy, $894 million on greeting cards, and $751 million on pets. That's all before we get to the lingerie, champagne, and candles. (Guys, we know you don't care for scented candles. Just think of them as proof that your Valentine trusts you with fire.)

Naturally, all that spending means taxes. The average sales tax rate here in the U.S. is 8.454%, which suggests that state and local governments will collect over $1.5 billion. Of course calculating that tax isn't always as easy as multiplying your purchase amount by the local rate. Some states define candy as "groceries" or "unprepared foods" and tax them at lower rates or exempt them completely. (True love may be pure and simple. Taxes, not so much.)

The real action comes once you and your Valentine get married. For years, the so-called "marriage penalty" has taxed married couples at a higher rate than single filers earning the same combined income. The Tax Cuts and Jobs Act eliminates that penalty for couples earning up to $400,000. But above that amount, it bites hard. Singles don't hit the 37% top tax bracket until $500,000 of taxable income, while joint filers hit it at just $600,000. For a couple earning $500,000 each, that's a difference of $8,000 in total tax — enough to buy a lot of roses!

Of course, there are tax advantages to tying the knot, too. You can make unlimited cash gifts to your spouse. Your estate tax unified credit doubles, to $11.2 million. (Maybe that's why rich old geezers marry younger women . . . yeah, they do it for the tax planning!) You can make twice as much tax-free profit selling your home than if you're single. What's not to love about that?

And if your marriage doesn't go as planned? You can still console yourself with tax-advantaged alimony payments — at least, for agreements finalized before the end of 2018. (You know why divorce is so expensive? Because it's worth it!) You might also get a tax deduction if you donate all the stuff your ex gave you to charity! No sense cluttering up your house with painful memories, right?

Here's something we know you'll love, no matter what your relationship status: keeping more for your sweetheart this holiday. The key to making it work, of course, is planning. So call us when you're ready to pay less tax every day!

Country Crooners Sing the Blues

Country music embraces a long tradition of songs about sadness and ruin, heartbreak and pain. It just makes sense, then, that country sometimes runs afoul of the tax system. Most famously, Willie Nelson found himself on the wrong side of a $16.7 million tax bill. And outlaw country icon David Allen Coe, who penned Take This Job and Shove It, drew three years probation and $980,000 in restitution for failing to report his income, which he insisted on taking in cash to hide from the IRS.

Joy Ford probably never expected she would become a part of that particular tradition. She got her start as a carnival dancer performing at state fairs. Her co-star Loretta Lynn inspired her to start singing, and she had several minor hits in the 1980s. She went on to operate the Bell Cove Club outside Nashville, where she showcased up-and-coming acts. But her eye for talent turned out to be far better than her eye for business.

Ford met with a producer to talk about a TV show, and met with a consultant who suggested converting the club into a seafood restaurant. But the show went nowhere and the consultant's advice went in one ear and out the other. She claimed losses of $210,298 for the years 2012-2014, and deducted them against income from trusts and a brokerage account. Business losses are deductible against outside income, of course, if you can show you're really trying to make money. But the IRS decided her business was just an expensive hobby, disallowed the losses, and case ended up in court.

Judge Foley took just two pages to find that Ford wasn't really trying to make a profit. "She had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove's perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove's overall performance." Not much to sing about, there!

Not all country musicians who take on the IRS wind up on the sad side. Remember Conway Twitty? (Who could forget a name like that? It sure beat Harold Lloyd Jenkins, the one he was born with!) In 1968, he rounded up 75 friends and associates to invest in a side venture called Twitty Burgers. Apparently, his fans found his vocal licks tastier than his burgers, and by 1971, all but one of the restaurants were shuttered. Twitty worried that the failure would hurt his reputation, so he repaid his investors out of his music income. Naturally, he deducted those repayments, totaling $96,492.

The critics at the IRS disallowed Twitty's repayments because they were related to the burger business, not the music business. So Twitty took the IRS to court, and the Tax Court ruled in his favor. Judge Irwin found that repaying the investors was an "ordinary and necessary" expense for "furthering his business as a country music artist and protecting his business reputation for integrity." (We're not sure how Twitty would have translated those happy results into a country song!)

Are you looking for happier music where your taxes are concerned? You'll need to do a little planning, and probably a little homework. But we can help you with that effort, and we promise you'll whistle a happy tune if you do. So call us when you're ready to save, and remember, we're here for your bandmates, too!

Two-Tired to Fight About It

When you think of "federal crime," you probably think of big-ticket offenses like mail fraud, identity theft, and tax evasion. But our criminal code is also full of, shall we say, lesser offenses. For example, according to the Crime a Day Twitter feed, "18 USC §1854 makes it a federal crime to cut, chip, or chop a government-owned tree to get turpentine out of it." 7 USC §8313 "makes it a federal crime to bring an imported camel's blanket into the United States without the permission of the port inspector." And 8 USC §1865 "makes it a federal crime to roller skate in Alaska's Sitka National Historical Park."

Our Internal Revenue Code similarly focuses most of its attention on core questions like brackets, rates, standard deductions, and personal credits. But the tax code's 70,000 pages include their fair share of lesser provisions, too. And the Tax Cuts and Jobs Act that just passed includes a couple that might sound like the tax equivalent of sneaking a smelly camel's blanket in under a port inspector's nose.

Here's one that just seems petty and mean. Under the old law, you could exclude a whopping $20 per month of income for expenses related to riding your bike to work, so long as you weren't getting other pretax transit benefits. That's not a whole lot of benefit for bike commuters. Granted, most bikes aren't that expensive — but cyclists face far bigger dangers than taxes, in the form of road-hogging trucks and SUVs who can run them over without even seeing them.

Section 11047 of the Act lets the air out of the "qualified bicycle commuting reimbursement," for tax years beginning after December 31, 2017 and before January 1, 2026. And how much will derailing this break save the Treasury? A million dollars. A whole million dollars a year in new revenue. That's a rounding error, at best, for a bill with trillions of dollars of impact.

Of course, the bill keeps the tax subsidies for car commuters that cost the Treasury $8.6 billion per year — and contribute to the six tons of carbon the average vehicle pumps into the atmosphere every year as well!

Here's another minuscule transportation-related change that wasn't buried quite so deep in the act's fine print, and so attracted a bit more attention. Under the old law, Code Section 4261 imposed a 7.5% ticket tax on payments to aircraft service management companies that help private plane owners with chores like scheduling, flight planning, and weather forecasting. The purpose of the tax was to replace revenue the Treasury loses by not charging private aviation passengers a ticket tax.

Section 13822 of the Act eliminates those taxes, under the rationale that aircraft management services shouldn't pay the ticket tax because they don't sell tickets. Plenty of observers cried foul at the fat cat jet owners getting another tax break. But the provision's primary sponsor was Democratic Senator Sherrod Brown of Ohio, who is nobody's idea of a pawn of the rich. And the congressional Joint Committee on Taxation estimates that grounding the tax will cost the Treasury less than $500,000 per year.

Paying the least amount of tax obviously means starting with bigger questions like choosing the right entity for your business. But this week's story shows that, whether your ride to work is a Schwinn or a Cessna, there's always an opportunity for planning. So call us when you're ready to save. We don't care how you get to our office . . . we just want to see you do it!

iTaxes Version 38 Billion.0

In 2016, SyFy debuted a new show called Incorporated about a dystopian future where corporations, not governments, rule the world. If that nightmare ever comes true, we all know which real-world corporation will rule them all. It's Apple, of course, which just took the shrink-wrap off their $5 billion ring-shaped headquarters in Cupertino, CA and is on the verge of becoming the world's first trillion-dollar company.

Odds are good that you've got an iDevice of some sort in your home, office, or pocket. Apple's product design geniuses use crack-like design and technology that keeps users hooked like heroin addicts, to make Apple the most valuable corporation in the world. But what you may not know is how Apple's financial geniuses use proactive tax planning to make their company even more valuable. And now, the Tax Cuts and Jobs Act has inspired them to act again.

Apple has scattered their manufacturing operations throughout the world to take advantage of lower costs overseas. (You think your 10-year-old's science fair project is special? Big deal — 10-year-olds in China are making iPhones!) This has prompted various entertaining debates over the ethics and politics of offshoring, which we won't presume to touch here.

Apple hasn't just offshored manufacturing operations to cut manufacturing costs. They've also offshored their profits, to take advantage of tax rates that are lower than our own traditional 35%. This involves strategies with names like the "Double Irish with a Dutch Sandwich" strategy, which sounds like something you'd see figure skaters attempting at the upcoming Winter Olympics. Apple's Irish subsidiary, Apple Operations International, earned $30 billion from 2009-2012, and didn't even file tax returns for those years.

Hoarding cash before the IRS gets to grab 35% of it doesn't mean stuffing it under some sort of supersized Irish mattress. The parent company borrows their own subsidiary's cash, deducts 35% of the interest they pay for it here in the U.S., and pays tax on that interest at just 12.5% in Ireland, shifting even more money out of IRS reach.

Now the Tax Cuts and Jobs Act has cut the rate on Apple's iProfits to just 21%. It even includes a bonus "get out out of jail free" card for companies with cash overseas, letting them pay a one-time 15.5% rate to load those bales of cash on a plane and bring them home. So Apple is repatriating $252 billion, and writing the IRS a $38 billion check — enough to finance the entire government of Wisconsin for a year, with enough left over to pay for Jacksonville or St. Louis, too. But that's still $43 billion less than paying the 35% on the full amount.

And what will Apple do with their iSavings? Throw a party, of course! They've announced plans to hire 20,000 new employees, build another major domestic campus, and boost R&D to diversify away from the iPhone. They'll also use billions more for dividends (which put cash in shareholders' hands) and share buybacks (which also rewards them by pushing prices up).

We realize you don't have $252 billion to plan for. But that doesn't mean you can't profit from planning, too. So give us a call when you're ready to take full advantage of the new tax law and see how much iCash we can put in your pocket!

He's Mister Tax Miser

Welcome to 2018! New Years' always brings changes to taxes. Key numbers, like tax brackets, standard deductions, personal exemptions, and qualified plan contribution limits, all roll over on January 1. But this year brings more change than any year since 1987. Washington has just passed a sweeping overhaul of the entire tax code, from working individuals all the way to multinational corporations. Tax planners across the country are scrambling to ferret out the opportunities hiding in its 503 pages of typically dense, impenetrable text. (There's a reason tax lawyers drive Jaguars.)

This year's tax bill avoids one particularly awkward tax transition we faced in 2010 — one that became, for some families, literally a matter of life or death. Remember the old children's Christmas special, Year Without a Santa Claus, with the dueling Heat Miser and Snow Miser? Those guys had nothing on 2010 . . . the Year Without an Estate Tax!

Estate taxes date back as far as 700 B.C. in ancient Egypt. (Of course, the Egyptians also buried their pharaohs with food, clothing, and jewelry for the afterlife.) Here in the United States, they began with the Revenue Act of 1862, which included gift and estate taxes ranging up to 6%, including bequests to charities. The Revenue Act of 1916 created the modern transfer tax system, with rates up to 10%. But those rates quickly climbed — when America's first billionaire John D. Rockefeller died in 1937, his estate paid 70%.

In 2001, the Bush tax cuts began raising the threshold for paying the tax from $675,000 to $3.5 million over a series of years through 2009. In 2010, the tax disappeared entirely. But then, due to Senate budget rules, it reset in 2011 at 55% on estates over $1 million. Of course, Congress had planned to do something to plug that one-year hole, but . . . you know how Congress sometimes doesn't get around to doing everything they're supposed to, and we rang in 2010 with no estate tax at all. Finally, in December 2010, Washington reinstated the tax beginning on January 1, 2011.

This presented a pretty straightforward challenge as 2009 drew to a close. Keep Grandpa alive past midnight! But December, 2010 posed a very different challenge. How much will Grandpa cost his heirs if he lives long enough to raise one final toast to auld lang syne? Here's how the Wall Street Journal reported one case:


"In New York the lapsing tax spawned a major family conflict, according to one attorney. As a wealthy patriarch lay dying at the end of the year, it became clear that under the terms of the will his children would receive more if he died in 2010, while his wife (not the children's mother) stood to benefit if he died in 2009. The wife then filed a "do not resuscitate" order and the children challenged it. The patriarch lived a few days into 2010, but his estate . . . remains unsettled given the legislative uncertainty."

What, if anything, happens to estate taxes in the newest law? Good news . . . the amount you can leave to your heirs without paying actually doubles, to $11.2 million! Even better, there's no provision for the rules to change again any time soon, which makes planning so much easier. So raise a toast to 2018 . . . and remember that, at least where taxes are concerned, saving money won't require you to pay the ultimate price. We'll be here for you this New Years' and beyond, with all the strategies you need to pay the least amount allowed!