Mark's Terrible, Horrible, No Good, Very Bad Day

When Mark Zuckerberg was 19 years old, he launched Facebook from his Harvard University dorm room. (Some cynics might say "stole" is a better word than "launched," but who wants to start that debate?) Since then, he's made Facebook one of the internet's most valuable brands. And as he's done it, his net worth has climbed as high as $81.6 billion, making him the world's third-wealthiest man behind Amazon founder Jeff Bezos and Microsoft co-founder Bill Gates.

At least, that was the case until July 25. That day, just after the market closed, Facebook released its second-quarter earnings. Revenue was up — but not as much as investors had hoped. When the market opened the next morning, investors unfriended the stock big-time. Zuckerberg saw $16.8 billion of his stash evaporate in the first hour of trading. (Shareholders as a group lost $120 billion.) That's roughly the total salaries of all 1,696 players in the National Football League. (Not a football fan? It's also enough to buy the Yankees, Dodgers, Cubs, Giants, and Red Sox combined.)

So at this point, Zuckerberg is hardly even rich anymore. But while he and his wife are tightening their belts, scrounging for change in the couch cushions, and debating whether to keep the HBO, we got to wondering what our friends at the IRS think of the news. The answer, not surprisingly: "it's complicated."

Zuckerberg owes tax on his regular income as soon as he earns it. But his salary is just a dollar a year, which doesn't leave much for Uncle Sam. Of course, he also gets some nice perks. Facebook spent $7.3 million on Zuckerberg's security last year. (Fortune 500 companies can't just hire a bunch of knuckle-dragging goons to trail their CEOs. Top bodyguards, who come from federal agencies like the State Department or FBI, command six-figure salaries, and Facebook's security chief served on former Vice-President Joe Biden's Secret Service detail.) That protection is taxable, too.

But the real action, for a tech entrepreneur like Zuckerberg, is in the stock. Facebook announced last September that Zuckerberg plans to sell 35 to 75 million shares — worth between $6 billion and $12.5 billion — to finance his charitable limited liability company. He'll owe tax on those sales, but he'll get corresponding deductions for much of the cash he donates. In fact, last year's Tax Cuts and Jobs Act made those gifts even more valuable, raising the deduction limit from 50% to 60% of his adjusted gross income.

The IRS gets another whack at the rest of Zuckerberg's stock at his death. Considering he's just 34, that probably won't be for a while. But at that point, at least under current law, they'll download 40% of his taxable estate over $11.18 million. Now, unless Facebook implodes like MySpace, Zuckerberg should still be worth billions at his death. But — Zuckerberg and his wife have announced plans to leave 99% of their fortune to charity. Charitable bequests aren't subject to that 40% tax, which leaves the IRS scrounging for crumbs from whatever table scraps the pair leave for their kids.

The bottom line here is that the IRS had no reason to regret Zuckerberg's terrible, horrible, no good, very bad day, because his smart tax-planning means they wouldn't have gotten into a relationship with the stock anyway. The good news for you is that you can put the same sort of planning to work for yourself. And you don't even have to lose $16 billion in a day to do it! Just direct-message us when you're tired of paying more than you have to. We're sure you'll "like" the savings!

Here's to Your Health!

When Congress raises the hood on the tax code, they're usually working to raise money to pay for government. But sometimes they're more interested in nudging us to behave in ways they can't legislate directly. Take the mortgage interest deduction, for example, which "cost" the Treasury $69.7 billion in 2013. That deduction encourages millions of Americans to spend billions of dollars buying homes, building homes, renovating money pits, and keeping their homes looking spiffy — all of which returns billions more through our overall economy.

Here's the catch. Everyone knows that medical and dental expenses are "deductible." But look a little closer and you'll see that code section 213 lets you deduct them only if you itemize, which leaves about 90% of Americans sitting on the bench. And even if you itemize, you can only deduct the amount of expenses over 7.5% of your adjusted gross income. So, on its face, the new deduction won't mean much.

It turns out, however, that millions of Americans who can't itemize can still benefit from tax-advantaged flexible spending accounts, medical expense reimbursement plans, and health savings accounts. The bill lets you reimburse PHIT expenses from those accounts. 

The Congressional Budget Office estimates the bill would cost the Treasury save taxpayers $3.5 billion over the next decade. That's enough to get special interests interested. The Wall Street Journal reports that "Fitbit, Inc., the American Heart Association and the American Sports and Fitness Association have all lobbied for the bill." And Planet Fitness stock climbed more than 4% the day the bill passed.

Guaranteed Winners

But there's one group we can count on to win big no matter who else loses, and that's the federal, state, and local tax collectors sharing the juice from the new action.

Gambling losses are deductible, but only if you itemize (which eliminates about 90% of taxpayers), and only up to whatever amount of actual winnings you report. That means that if at the end of the year, you're in the black, you'll owe tax on your winnings — but if you're in the red, there's no deduction for your loss. That gives Uncle Sam the perfect "heads I win, tails I don't lose" proposition. (Odds are good that whoever said the only way to win at gambling is to be the house never saw how the IRS rigged the game!)

There's one more quasi-tax worth considering here. Sports leagues like the NFL and NBA are pushing to collect an "integrity fee" equal to 1% of the total amount bet. (Sports books generally collect a 10% commission on winning bets, so 1% of the amount bet equals about 20% of their gross revenue.) The leagues say this compensates them for their intellectual property rights in statistics used in betting. But critics say the integrity fee is more like just a simple shakedown: "Nice place you got here . . . it would be a shame if anything happened to it!"

Here's a proposition we bet you'll like. Bring us your taxes and challenge us to help you pay less. You literally can't lose. Call us today and see how much you're losing — you can't win if you don't play!

Area Man Treats Colleague to Dinner, Drinks

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! 

Back-to-School

August 29, 2016

Back-to-School

In case you missed it, back-to-school season is here. Everyone is busy getting ready to go back-to-school. Back-to-school specials by stores are everywhere. Mom and Dad are buying school supplies such as pens, paper, computer and smart phones for their students.

Families are not the only ones shopping for needed supplies this time of year. Teachers have to adapt to shrinking school budgets, and they often contribute their own funds to the cause depleting the amount of money they receive (small as it is). The IRS wants to do its share, too. The Education Expense Deduction allows teachers who work full-time at any accredited school to deduct up to $250 paid to purchase books, school supplies, computer equipment, software and even sports gear on behalf of their students.

So today’s lesson is – when it comes to taxes, school is never over. The more you know and the more you plan, the less you’ll waste on taxes you don’t have to pay. So email us at info@coloradotaxcoach.com and let us help you with a little tutoring.

New Simplified Home Office Deduction

New Simplified Home Office Deduction

Home office expenses can be an overlooked source of valuable business deductions.  Many business owners don't claim them because they fear (incorrectly) that home offices are an audit "red flag," or because the recordkeeping is a pain.  (Form 8829, which helps calculate the deduction, includes 43 lines and asks you to "see instructions" 17 times.)  But now the IRS has released a "safe harbor" method that may make home office deductions more accessible. 

The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space.  You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual.  But you won't have to calculate any actual expense or depreciation deduction for the space.  On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction. 

You can determine year-by-year which home office deduction method to use.  You don't have to elect one and lock yourself into it for the future. 

Do you have a space in your home that you use "regularly and exclusively" for business, but don't specifically deduct it as such?  To see if the new safe harbor makes sense for you, call us at 970.668.0772

New Simplified Home Office Deduction

New Simplified Home Office Deduction

Home office expenses can be an overlooked source of valuable business deductions.  Many business owners don't claim them because they fear (incorrectly) that home offices are an audit "red flag," or because the recordkeeping is a pain.  (Form 8829, which helps calculate the deduction, includes 43 lines and asks you to "see instructions" 17 times.)  But now the IRS has released a "safe harbor" method that may make home office deductions more accessible. 

The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space.  You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual.  But you won't have to calculate any actual expense or depreciation deduction for the space.  On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction. 

You can determine year-by-year which home office deduction method to use.  You don't have to elect one and lock yourself into it for the future. 

Do you have a space in your home that you use "regularly and exclusively" for business, but don't specifically deduct it as such?  To see if the new safe harbor makes sense for you, call us at 970.668.0772.

 Sincerely,

Larry D. Stone, CPA