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Carrots Versus Sticks

David Robson - Tuesday, November 27, 2018

Take a look at our Internal Revenue Code. No, really, take a good look. (You can buy it on Amazon for just $161.89: two thick paperbacks totaling 4,968 pages. You even get free Prime shipping!) At first glance, it's all about the revenue. For FY 2019, federal income taxes should hit nearly $1.7 trillion. Payroll taxes will top $1.2 trillion. Corporate taxes, $225 billion. And estate taxes will generate somewhere around $20 billion, depending on how many billionaires die (#dropinthebucket). But taxes aren't just about the revenue. Washington loves to use taxes to accomplish goals they can't legislate directly. This generally takes the form of "tax expenditures" — special deductions, credits, or other rules designed to benefit specific favored activities or taxpayers.

The mortgage interest deduction may be the most famous of these carrots. For most people, homeownership is a cornerstone of the American Dream. But Congress would be hard-pressed to pass legislation requiring it, or even directly rewarding it. (Buy a home! Get a free $5,000 Target gift card!) So instead, they use taxes to subsidize it. For 2018, homeowners saved $68.1 billion by deducting mortgage interest on their taxes.

But every so often, the government uses taxes as a stick . . . or at least they try to. Last week, the Wall Street Journal published an editorial blowing the whistle on one such effort that may violate the First Amendment. Specifically, it accuses the IRS of punishing nonprofit organizations that advocate for legal marijuana: "The innocuously named Revenue Procedure 2018-5 contains a well-hidden provision enabling the Service to withhold tax-exempt status from organizations seeking to improve 'business conditions . . . relating to an activity involving controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by federal law.' That means that to obtain tax-exempt status under any provision of the Internal Revenue Code's Section 501 — whether as a charity, social-welfare advocacy group or other type of nonprofit — an organization may not advocate for altering the legal regime applicable to any Schedule I or II substance." Bottom line, according to the authors: "The IRS seeks to control independent policy advocacy. That's something the federal government may not do." If they can't prohibit the speech directly, they can't use the tax system to do it indirectly. Yes, "the devil's lettuce" is still prohibited under federal law. But 33 states have passed laws legalizing it in some form or another. It says a lot that the buttoned-down stiffs at the Wall Street Journal could publish the same editorial as the stoners at High Times magazine. So why would the IRS choose to wield this particular stick? And is it really the IRS's job to make those sorts of decisions anyway? Isn't the IRS just supposed to be the government's bill collector?

As far as we're concerned, we don't care what motivates you more, carrots or sticks. We just want to make sure you get all the breaks the law allows. But we can't do it if you don't ask us. So pick up the phone before time runs out to save in 2018, and lets see how we can put the rules to work for you!

 

 


All the Fun and Games

David Robson - Friday, November 16, 2018

Some of the world’s most popular board games give players the chance to live out professional fantasies. Aspiring property sharks can cheat each other with the classic Monopoly. Would-be Sherlock Holmeses can track down killers with Clue. Armchair generals can settle down to an evening of Risk. But until today there’s never been a game to let aspiring tax planners outwit the Internal Revenue Code. Shouldn’t that be at least as much fun as figuring out it was Colonel Mustard in the Library with the candlestick?

Well, that all changes in the form of a new board game called “Transfer Pricing: The Game.” Transfer pricing is the process for setting the value of transactions between businesses under common ownership and control. Let’s say Amalgamated Widgetsowns a subsidiary that makes parts in, say, Macedonia, then puts them together here in the U.S. How much should the parent pay for the parts? That maysound boring and technical (because, yeah, it is). So what difference does it all make? Let’s say the corporate tax rate in Macedonia is 10% and the rate here is 21%. Naturally, it makes sense to allocate as much of the profit as possible in Macedonia where the rate is lower.Of course, tax collectors everywhere are on to the game. So you have to be able to show them you’re transferring at an “arm’s length” price — the same price a disinterested buyer would pay from a disinterested seller. The Organisation for Economic Cooperation and Development sets out rules for pricing all sorts of transactions, including tangible items, intellectual property, and even loans.

Now you’re excited to try it yourself! Too bad you don’t own a foreign subsidiary. That’s where “Transfer Pricing: The Game” comes in. The publisher describes it as “the card game that decides who has the most substance. Now available, with an arm’s length price of only $30.” The goal? “You run a subsidiary ofOrchid Enterprises and build a substantive value chain, grow income, destroy your corporate rivals, and defend your accomplishments against various TaxAuthorities, legal challenges, and business pitfalls. Prove once and for all who is the greatest transfer pricing professional of all time!”The game is designed for 2-8 players, ages 12 and up. Open the box and you’ll find three sets of cards. “Function” cards represent basic business functionslike marketing. “Action” cards drive game play. And “defense” cards provide power you need to defend your actions against various challenges from tax authorities.There’s no board, so technically it’s not a “board game,” but if you’re not comfortable with technicalities, this really isn’t the game for you. The contest starts when the first player draws an action card and follows the directions (like “audit an opponent”). Once you complete them, you’ll drawanother function card and trade it for one of your existing function cards or discard it. To finish a turn, draw a defense card and attach it to a function card or hold it for future play. Look, who are we kidding? The whole thing sounds about as much fun as a group project for an MBA class. Maybe that’s whyit recently ranked just #178,162 in Amazon’s “Toys & Games” category.

Here’s all you really need to know. Overpaying your tax is no fun, and tax planning isn’t a game. So call us when you’re ready to play, and get a serious plan to pay less. Then pass GO and find something fun to do with your savings!


Don’t Let These Guys Catch You Paying Taxes!

David Robson - Tuesday, November 13, 2018

Streaming TV services like Netflix have changed how we watch television, dropping an entire season of a series at once for us to binge on. They’ve even breathed new life into “quality television,” a phrase that used to provoke laughs from that insufferably smug type of person who used to brag that they didn’t even own what we all used to call the “idiot box.”

Netflix has mined TV gold from all sorts of settings. Orange is the New Black explores life inside a women’s prison. Stranger Things is a love letter to classic 1980s sci-fi/horror films. And Bojack Horseman takes us inside the world of a half-man, half-horse, has-been TV star who drinks too much. It was only a matter of time before we’d see inside the upside-down world where the IRS unleashes investigators to chase business owners for . . . wait for it . . . paying their taxes.

Ozark introduces us to Marty Byrde, a frugal Chicago-area financial advisor and family man who drives a 10-year-old Honda and resists moving his firm to flashy new downtown offices. (Prudent, right?) One night, he takes an emergency meeting with his partner, where we discover his realbusiness is laundering cash for a Mexican drug cartel. Then Marty learns his associates have stolen millions (spoiler alert: bad move) and watches the boss’s sicarios slaughter them and nonchalantly stuff their bodies in barrels.

Marty, played by the always-slightly-oily Jason Bateman, survives by promising to repay what his partners stole and launder another $500 million. He moves his family to Missouri’s Lake of the Ozarks, meets a colorful cast of local characters, and searches for businesses he can use to ply his trade. Meanwhile, investigators have found the bodies from the massacre and connected them to the partner who split town. Adventure and hilarity ensue for 20 episodes, and just like that, your entire weekend is gone.

As for the IRS, they don’t get all judge-y about how you make your money. They just want their slice of the pie. (Pie is delicious.) But they do get judge-y when you try to pass off cherry pie as apple. That’s a real problem for drug cartels. Their business generates cash, and lots of it. They can’t just take suitcases full of Benjamins to the bank without raising red flags. They need to turn that dirty cash into legitimate funds they can use to buy things like jet planes, islands, and tigers on a gold leash.

That’s where financial alchemists like Marty earn their keep. They find legit businesses (like a struggling restaurant and a skeevy “gentlemen’s club”) to hide behind. They run the cash through the legit business’s books and deposit it in the legit business’s bank. They even pay tax on it. Presto, no more narcodollars! It may not be the kind of business they teach in fancy MBA programs. There aren’t any glitzy national conferences, or PR-minded professional associations with continuing education and ethics requirements. But hey, it’s a living. (Until suddenly one day it’s not.)

IRS agents who target Marty and his ilk are experts in following the money. They partner with agencies like the FBI and DEA to stop crooks from hiding their loot, even when “hiding” means paying taxes on it like anyone else.

Sadly, we can’t help if you get mixed up with a Mexican cartel. But we can help you stop wasting money on taxes you don’t have to pay. So call us when you’re ready for a plan, and have fun binging on the savings!