Don't Count Your Chickens...

A couple of weeks ago, we wrote about the great toilet paper shortage of 2020. It gave us a great opportunity to indulge in the sort of lowbrow humor that made MAD magazine such a hit with 10-year-old boys. The problem turns out to be simple. Toilet paper makers produce two separate products for two separate markets: the plushy stuff we use at home and the scratchy stuff we find at offices and businesses. With coronavirus stay-at-home orders keeping us housebound, we've upset that usual balance of supply and demand.

But toilet paper isn't the only commodity with a scrambled supply curve right now. This week's story involves a much-loved delicacy invented by Teresa Bellissimo at the Anchor Bar in Buffalo, NY, and an odd tax that has nothing to do with her creation. That's right . . . coronavirus has created a national chicken-wing glut, at a time when politicians and economists are fighting over a "chicken tax" you've probably never heard of!

First, the glut. Why are there so many wings? The problem here stems from the same imbalance that emptied toilet paper aisles. Most people don't get their wing fix at home. They chow down at bars and restaurants, usually in front of TV sports. Suppliers were "locked and loaded" for March Madness. But now we're all cooped up at home. Restaurants, bars, and even March Madness itself have all gone dark. Demand for the tasty snack has plummeted. The wholesale price of wings has dropped over 20%, from $1.60 to $1.25 per pound. And commercial packaging won't fly for home kitchens.

(While we're on the topic, and don't get us started on so-called "boneless" wings. There's no such thing as a boneless wing. It's just something menu planners hatched up so grownups wouldn't be embarrassed ordering chicken nuggets. As if there's something wrong with chicken nuggets to begin with. Also, do you dip your wings in blue cheese? Or do you prefer ranch dressing because you think blue cheese smells like feet?)

Now for the tax. After World War II, "factory farming" turned chicken, which had been a delicacy in Europe, into a staple. We were producing enough of it here to satisfy demand in Europe, too. But overseas governments naturally wanted to protect their own farmers. So, in 1961, Germany and France slapped a tariff on American chicken. Deep-fried diplomacy failed to resolve the dispute, dubbed the "chicken war." In 1964, President Johnson retaliated with a 25% tariff on imported chicken — and, among other things, light trucks and vans. (Definitely not chicken feed!)

Of course, just like every party has a pooper, every tax has a loophole. (In trade, it's called "tariff engineering.") In 1972, Ford and Chevy realized they could import foreign-built trucks with no cargo bed or box at a 4% tariff, then finish the vehicles here to avoid the remaining 21%. (Jimmy Carter closed that loophole in 1980.) Today, Ford imports Transit Connect vans from Turkey with rear seats to avoid the tax, then strips them out before sale. Mercedes imports parts for its Sprinter vans to assemble in South Carolina, then sells the final product as "made in America."

That same tariff is still in effect, 55 years later. Donald Trump, never one to walk on eggshells, has even tweeted praise for it, arguing that if we had it in place on passenger cars, General Motors wouldn't have had to close factories in 2018. (Right now it may not matter, considering coronavirus has run new car sales off the road along with chicken wings.)

Today it looks like most of the excess wings will wind up frozen for a day, hopefully not too far away, when they can be served at your favorite local pub. Until then, we'll be keeping an eye out for any sort of tax planning developments to help ease your way through the crisis!

Overzealous

Four years ago, a consortium of European journalists broke a story based on 11.5 million documents leaked from the Panamanian law firm Mossack Fonseca. The exposé detailed how the firm's clients across the world used offshore shell companies to hide assets and evade taxes. (Remember, tax avoidance = legal; tax evasion = go to jail.) The story, naturally dubbed "the Panama papers," named names and focused new attention on what British author Somerset Maugham dubbed "sunny places for shady people."

When the scandal first broke, Iceland's Prime Minister stepped down after he was exposed as a client. Vladimir Putin's best friend, a concert cellist, faced harsh scrutiny over his billions. (He said they were donations from rich Russians to buy instruments for young musicians. Riiiight.) Hollywood turned it into a movie starring Meryl Streep. But stories like this tend to hit like dropping a rock in a pond. After the first big splash, a series of smaller ripples continue spreading outward. This week's story involves one of those ripples hitting an American courthouse.

Our hero, Dick Gaffey, is a CPA working just outside of Boston. (Well, not for much longer.) His firm's website says, "we work vigorously to lower our clients' taxes, improve their businesses and preserve their estates." That's just marketing hype for most accountants, who spend their days more or less putting numbers in boxes. But Dick really did work vigorously. He went the extra mile, including places where other accountants know not to tread. (You know those old 15th- and 16th-century world maps, where the edges said, "Here Be Dragons"? That's where Gaffey went.)

Gaffey's clients included a colorful gentleman named Harald Joachim von der Goltz, a German-born Guatemalan citizen who lived in the U.S., and thus owed U.S. tax on his worldwide income. Von der Goltz, a banking heir and venture capitalist who fled Guatemala to escape civil war, probably loved his $2.5 million beachfront condo on Key Biscayne. Apparently, though, he didn't love paying the taxes that helped make Florida a safer place to live.

Von der Goltz used Mossack Fonseca to establish a family trust and private foundation controlled through a series of holding companies. That's not illegal, so long as the real owner acknowledges their interest. But von der Goltz claimed his 100-year-old mother was the owner. And Gaffey signed bank documents falsely claiming the foundation wasn't subject to U.S. withholding. Then the story broke. When investigators came sniffing around, von der Goltz sold his condo to his children's trust for $100 and skedaddled. U.S. officials eventually arrested him in London.

Gaffey must have known he was next. He was arrested on December 4, 2019, and trial was scheduled to start on March 6. No doubt he planned to defend himself vigorously. Then von der Goltz pled guilty. Oops. Last week, Gaffey pled guilty to eight felony counts. On June 29, he'll find out how much time he can expect to spend surrounded by "inmates" instead of "clients."

Ask any scientist and they'll tell you the two most common elements in the universe are hydrogen and stupidity. Von der Goltz and Gaffey chose stupidity, and they chose poorly. But you don't have to hide your money to pay less tax. You just need advisors who understand how to use the tax code to your maximum advantage. That's where we come in, and we're looking forward to helping!

War is Hell. Taxes, Too.

Moviegoers the past few years could be forgiven for thinking comic books had taken over Hollywood. So much of the "sophisticated adult drama" that grownups used to see in theaters has migrated to streaming video, that it seems suburban multiplexes are reserved for Batman, Superman, and their cape-wearing cronies. (Or are you more of a Marvel Cinematic Universe fan?)

Last month, director Sam Mendes released a welcome tale of actual human heroes based on his grandfather's service in World War I. 1917 follows two British soldiers with impossible orders to cross into enemy territory and deliver a message to save 1,600 of their comrades — including one's own brother — from walking into a deadly trap. The film is presented as being shot in a single unbroken take, which some reviewers have said comes across as gimmicky and grandstanding. Still, it's a visual feast, and it's already grabbed the Golden Globe for Best Drama.

Most viewers aren't going to be thinking about taxes when they see 1917. But we don't review movies here, we review taxes. And there is a connection. Before World War I, the income tax was just an experiment, but after the war, it had become the significant revenue source we've all come to know and love.

The Revenue Act of 1913 had dramatically cut average tariffs on imported goods, from 40% to 26% and replaced that lost revenue with a new income tax. Rates started at just one percent on incomes over $3,000 (about $78,000 in today's dollars) and climbed to 7% on incomes over $500,000 ($13 million today, or almost as much as Cincinnati Bengals quarterback Andy Dalton earned leading his team to a 2-14 season).

Those rates may have worked in peacetime. But World War I torpedoed international trade and tariff collections, and joining the war meant Uncle Sam needed cash, pronto. The Revenue Act of 1916 doubled the bottom rate to a whopping 2% and added a new top rate of 15% on incomes above $2 million ($47 million today, or as much as Robert Downey Jr. makes for putting on his Iron Man suit). The 1916 act added an estate tax of 10% on amounts over $5 million. The Revenue Act of 1917 went even further, quadrupling the top rate to 67% and bumping the estate tax rate to 15%.

In fairness, there weren't a lot of people not named Rockefeller making that kind of money. The hedge funds and stock options that create so much of today's eight-figure incomes hadn't been invented. "Motion pictures" were still silent. The NFL didn't even exist, and baseball's highest-paid player, Ty Cobb, made just $20,000 in salary. (Like many athletes, the Georgia Peach made far more on endorsements and investments — in Cobb's case, his early stakes in Coca Cola and General Motors grew to north of $12 million.)

After the war, Washington dropped rates to "just" 25% on incomes over $100,000. At one point, tax filings were even public — you could show up at the local IRS office and check out your boss's return. The result, of course, was the Roaring 20s, an era characterized by jazz, flappers, and bathtub gin. (OK, Prohibition might have had something to do with the quality of the booze.) Then the market crashed, and rates went back up because of the Depression.

Today, it's hard to imagine Congress and the White House mobilizing to quadruple tax rates in a single year. Fortunately, we're not facing a World War forcing us to do it! So if you make it to the theater, enjoy 1917 as an action movie, not a financial planning exercise, and leave the taxes to us!

Pumpkin Spice-Flavored Taxes

October is chock-full of obscure holidays and commemorations. October 3 is National Boyfriend Day. October 15 — the real personal tax filing deadline — is National Grouch Day. (Coincidence? We think not.) October 19 serves up National Seafood Bisque Day (which sounds a lot tastier than October 25, National Greasy Food Day). Then there's October 21, National Clean Your Virtual Desktop Day, which sounds like it was cooked up by the same HR funsters who think "trust falling" into a co-worker's arms is somehow an appropriate thing to do at work. We swear we're not making any of this up.

But none of those can compare to the big orange ball of fun waiting towards the end of the month. We're talking about October 26: National Pumpkin Day. Believe it or not, pumpkins are more than just everyone's favorite gourd — they're responsible for generating millions of tax dollars for government everywhere.

For starters, check out actual pumpkin sales. Americans are expected to spend $377 million on cucurbita pepos to carve into jack o'lanterns in 2019. That means the IRS and state tax departments will harvest millions in income taxes from the farmers who grow them, then millions more in sales taxes from the families who buy them. No wonder all those pumpkins are smiling!

Next up, pumpkin pie: in 2015, Costco alone sold 5.3 million of them at $5.99 each. For those of you who weren't math majors, that's $31.7 million worth of creamy goodness. The high fat content in the crust, along with the egg-based custard filling, make them ideal for freezing until Christmas. So pick up two or three, and consider the extra sales tax a small price to pay for the taste of nostalgia.

And next, there's canned pumpkin pie filling. A couple of years ago, a vicious rumor started making the rounds that the glop you whip into your pie is actually just butternut squash. But Libby's, the Nestle subsidiary that sells $130 million of canned pumpkin filling every year, reports that they're just using a different strain of pumpkin that makes a richer, sweeter puree than regular carving pumpkins. Governments collecting sales on the pies can sigh in relief that they're not abetting a scam.

But while we're on the topic of "Things That Aren't Really Pumpkin for $200, Alex," pies are just the warmup for the real action. Love it or hate it (and there's not a lot of in-between), it's pumpkin spice season. It started as a twee Starbucks gimmick. But today's Pumpkin Spice Industrial Complex has inched its creepy tentacles into everything from candles to kale chips, and donuts to dog treats. Head to your doctor to get a flu shot, and the nurse will probably ask if you want pumpkin spice with that.

Here's the thing. Pumpkin spice — a blend of cinnamon, nutmeg, ginger, cloves, and allspice — started out as something called "pumpkin pie spice" to amp up the sometimes-bland pies. But lazy Americans quickly dropped the "pie" part. And ever since 2004, when Starbucks rolled out their flavored lattes nationwide, pumpkin spice has become a symbol for all things autumn. Americans will gobble $600 million worth of the stuff this fall, putting millions more in tax collectors' pockets.

Now, this whole discussion may sound like a silly exercise. (Ok, it is.) But there's an important lesson lurking under the filling and the whipped cream. Every financial decision you make has at least some tax consequence, even if it's just a trip to the bakery aisle. That's why it's so important to keep us involved before big financial choices, and avoid expensive tax mistakes! 

Risky Business

Turn on any television, any time of day or night, and you're likely to see an insurance ad, or two, or a dozen. Flo is showing off her "name your price" tool, which sure looks like her company's way of saying "you may not be able to afford all the insurance you need, but we're happy to sell you whatever you can afford." There's the ubiquitous gecko, telling you his company sells insurance for your RV and motorcycle, too. And there's Duncan, age 42, buying an incredible half-million dollars of term life insurance for just $27 per month.

 Losing a tax audit may not sound as tragic as, say, Keith Richards losing his hands. But the whole concept of "insurance" is about guaranteeing payment in the event of a specified loss. So, if Keith Richards can insure the hands that conjured up "Jumpin' Jack Flash" out of an ordinary six-string, shouldn't we be able to buy insurance to cover unexpected losses to the IRS? It turns out the answer is yes . . . and there's even more than one way to do it.

    Business owners can use something called an enterprise risk management program to insure risks that they're currently covering out of their own pockets. These typically include operational and strategic risks, like the cost of defending sexual harassment claims, cyber risks, and the loss of key suppliers or vendors. But you might also insure against the cost of defending an IRS audit. The cost of insuring the risk is deductible — and if you have to collect, the cost of defending yourself is deductible, too!

Fortunately, most tax savings don't call for any insurance at all. We help clients save taxes with a complete menu of court-tested, IRS-approved strategies. In fact, some of our most powerful strategies actually lower your risk of being audited. So leave the gecko at home, because he wouldn't be any help at an audit anyway, and see if we can save you 15% or more on your income tax!

Small Business and Taxes – Back to Biz Monday

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

One of the biggest hurdles you’ll face in running your own business is staying on top of your numerous obligations to federal, state, and local tax agencies. Tax codes seem to be in a constant state of flux making the Internal Revenue Code barely understandable to most people.

The old legal saying that “ignorance of the law is no excuse” is perhaps most often applied in tax settings and it is safe to assume that a tax auditor presenting an assessment of additional taxes, penalties, and interest will not look kindly on an “I didn’t know I was required to do that” claim. On the flip side, it is surprising how many small businesses actually overpay their taxes, neglecting to take deductions they’re legally entitled to that can help them lower their tax bill.

Preparing your taxes and strategizing as to how to keep more of your hard-earned dollars in your pocket becomes increasingly difficult with each passing year. Your best course of action to save time, frustration, money, and an auditor knocking on your door, is to have a professional accountant handle your taxes.

Tax professionals have years of experience with tax preparation, religiously attend tax seminars, read scores of journals, magazines, and monthly tax tips, among other things, to correctly interpret the changing tax code.

When it comes to tax planning for small businesses, the complexity of tax law generates a lot of folklore and misinformation that also leads to costly mistakes. With that in mind, here is a look at some of the more common small business tax misperceptions.

1. All Start-Up Costs Are Immediately Deductible

Business start-up costs refer to expenses incurred before you actually begin operating your business. Business start-up costs include both start up and organizational costs and vary depending on the type of business. Examples of these types of costs include advertising, travel, surveys, and training. These start up and organizational costs are generally called capital expenditures.

Costs for a particular asset (such as machinery or office equipment) are recovered through depreciation or Section 179 expensing. When you start a business, you can elect to deduct or amortize certain business start-up costs.

For tax years beginning in 2010, you can elect to deduct up to $10,000 of business start-up costs paid or incurred after 2009. The $10,000 deduction is reduced (but not below zero) by the amount such start-up costs exceed $60,000. Any remaining costs must be amortized.

2. Overpaying The IRS Makes You “Audit Proof”

The IRS doesn’t care if you pay the right amount of taxes or overpay your taxes. They do care if you pay less than you owe and you can’t substantiate your deductions. Even if you overpay in one area, the IRS will still hit you with interest and penalties if you underpay in another. It is never a good idea to knowingly or unknowingly overpay the IRS. The best way to “Audit Proof” yourself is to properly document your expenses and make sure you are getting good advice from your tax accountant.

3. Being incorporated enables you to take more deductions.

Self-employed individuals (sole proprietors and S Corps) qualify for many of the same deductions that incorporated businesses do, and for many small businesses, being incorporated is an unnecessary expense and burden. Start-ups can spend thousands of dollars in legal and accounting fees to set up a corporation, only to discover soon thereafter that they need to change their name or move the company in a different direction. In addition, plenty of small business owners who incorporate don’t make money for the first few years and find themselves saddled with minimum corporate tax payments and no income.

4. The home office deduction is a red flag for an audit.

While it used to be a red flag, this is no longer true–as long as you keep excellent records that satisfy IRS requirements. Because of the proliferation of home offices, tax officials cannot possibly audit all tax returns containing the home office deduction. In other words, there is no need to fear an audit just because you take the home office deduction. A high deduction-to-income ratio however, may raise a red flag and lead to an audit.

5. If you don’t take the home office deduction, business expenses are not deductible.

You are still eligible to take deductions for business supplies, business-related phone bills, travel expenses, printing, wages paid to employees or contract workers, depreciation of equipment used for your business, and other expenses related to running a home-based business, whether or not you take the home office deduction.

6. Requesting an extension on your taxes is an extension to pay taxes.

Extensions enable you to extend your filing date only. Penalties and interest begin accruing from the date your taxes are due.

7. Part-time business owners cannot set up self-employed pensions.

If you start up a company while you have a salaried position complete with a 401K plan, you can still set up a SEP-IRA for your business and take the deduction.

A tax headache is only one mistake away, be it a missed payment or filing deadline, an improperly claimed deduction, or incomplete records and understanding how the tax system works is beneficial to any business owner, whether you run a small to medium sized business or are a sole proprietor.

And, even if you delegate the tax preparation to someone else, you are still liable for the accuracy of your tax returns. If you have any questions, don’t hesitate to give us a call today. We’re here to assist you.

~Larry Stone

Larry D. Stone,  Stone CPA

970.668.0772,    970.668.0434,

larry@stone-cpa.com – Colorado Tax Coach

Author of “The Secrets of a Tax Free Life”

Play Ball! – Back to Biz Monday

This article was originally Published in Mountain Town Magazine. https://mtntownmagazine.com/

The 2013 baseball season is barely a month old, and fans are already bickering over the first twists and turns. That’s because rabid fans are never content to just watcha game. They have to discuss it — among friends, at the local tavern, and on talk radio. If a pop fly drops for a single behind Cubs center fielder David DeJesus, and no one is there to argue he should have caught it, does it really make any noise?

Statisticians have always delighted in analyzing baseball — some would say, analyzing it to death. So-called “sabermetricians” (followers of the Society of American Baseball Research, or SABR) pore over arcane stats like “batting average on balls in play” (a measure of how many balls in play against a pitcher go for hits, excluding home runs, used to spot fluky seasons) or “value over replacement player” (a measure of how much a player contributes to their team in comparison to a fictitious replacement player who is an average fielder at his position but below-average hitter).

Now there’s a whole new category of relevant statistics for fans to debate. The Journal of Sports Managementhas just accepted a paper from Fordham University business professor Stanley Veliotis, titled Salary Equalization for Baseball Free Agents Confronting Different State Tax Regimes. And this one will blow the lid right off Moneyball! Here’s the abstract:

“This paper derives equivalent gross salary for Major League Baseball free agents weighing offers from teams based in states with different income tax rates. After discussing tax law applicable to professional sports teams’ players, including ‘jock taxes’ and the interrelationship of state and federal taxes, this paper builds several models to determine equivalent salary. A base-case derivation, oversimplified by ignoring non-salary income and Medicare tax, demonstrates that salary adjustment from a more tax expensive state’s team requires solely a state (but not federal) tax gross-up. Subsequent derivations, introducing non-salary income and Medicare tax, demonstrate full Medicare but small federal tax gross-ups are also required. This paper applies the model to equalize salary offers from two teams in different states in a highly stylized example approximating the 2010 free agency of pitcher Cliff Lee. Aspects of the models may also be used to inform other sports’ players of their after-tax income if salary caps limit the ability to receive adequately grossed-up salaries.”

Aren’t you glad you’ve got us to make sense of this stuff? (And this is baseball — it’s supposed to be fun.)

Taxes have always dogged professional athletes. What basketball fan hasn’t wondered what role Florida’s sunny tax-free climate played in luring superstar LeBron James to the Miami Heat? And really, who can blame golfing great Phil Mickelson for threatening to abandon California to escape a 63% tax rate?

But just imagine the debates this paper will inspire! How will interleague play affect equivalent gross salaries for NL East teams playing even more games in tax-heavy New York? Does A-Rod really come out ahead by sticking with the Yankees? Will fists fly when Canadians realize none of this has any meaning for the lowly Toronto Blue Jays?

You may think the tax code is harder to understand than the infield fly rule. (You may even be right.) But there’s one very important difference between baseball and taxes. Stats geeks can use measures like the “player empirical comparison and test algorithm” to guess how players might perform for the rest of the season. But proactive tax planners like us can use proven strategies like the medical expense reimbursement plan, S-corporation, or home office deduction to guarantee less tax. So call us when you’re ready to measure some savings that count!

~Larry Stone

Larry D. Stone,  Stone CPA

970.668.0772,    970.668.0434,

larry@stone-cpa.com – Colorado Tax Coach

Author of “The Secrets of a Tax Free Life”

Over-the-Top Thanks For This Tax "Break"

Wall Streeters have a lot to give thanks for this holiday season. Earnings are up, so bonuses are up. And that, in turn, means taxes are up, too. The New York Post just reported that Wall Street Bankers Are Throwing Excessive Parties To Dodge Taxes. But will the wining and dining actually put money back in their pockets? Or is the tax angle just a convenient excuse to party up a storm on the company tab?

Wall Street culture rewards bankers for results. They generally start out with low fixed salaries, at least as a percentage of their overall pay. Then, around this time of year, the bosses get together to count their profits, and shower producers with whatever bonuses it takes to keep them from jumping ship to the competition. In 2017, Wall Street pay jumped 13% to average $422,500 per head. And one consultant predicts sales and trading pros could see 20% more this year in their stockings.

Here's the problem for all those Masters of the Universe glamming it up in their Manhattan condos. Last year's tax bill cut the top federal rate from 39.6% to 37%. However, it also capped deductions for state and local taxes to a flat $10,000. That's a real punch in the gut for Manhattanites paying 13% to the state and city. Throw in 3.8% more for Medicare, and that brings the total skim up to 54%. That's not as bad as the "one for you, nineteen for me" the Beatles sang about in Taxman. But it's hard to get rich if tax collectors are taking home more than you do!

And so, concludes the Post, "Bankers and traders will be celebrating the prospect of massive, multimillion dollar payouts — and they'll use the mega-expenses of year-end blowouts as write-offs for their inflated tax bills, according to industry sources."

It turns out, though, writing off a pricey dinner isn't a very tasty tax shelter. Let's say you treat yourself and three colleagues to the $795/person "white truffle" extravaganza at Daniel, an Upper East Side mainstay. (Relax, your wine pairings are already included in that price!) $3,200 sounds like a lot to shell out for dinner. But after you deduct 50% and multiply it by the 54% tax you save, Uncle Sam covers $864 of that bill. 

Now, $864 might cover the sales tax and tip. But in the end, it's a subsidy, not a savings. Nobody puts money in their pocket by splurging on Florida frog leg mousseline with porcini mushrooms in a white truffle white wine sauce. It's delicious, if you're into that sort of thing, and it looks great in your Instagram feed. But you can't retire on it (unless you're the celebrity chef selling it.) You'd think seven-figure financial wizards would be smart enough to figure that out! (Or maybe they're making so much it doesn't really matter?)

While bankers are out celebrating, they should raise a toast to a different blessing. The law that capped deductions for state and local taxes also eliminated them altogether for business entertainment. But Washington did such a clumsy job writing it that tax pros across the country worried it might have killed writeoffs for meals, too. Last month, the IRS clarified that meals are still deductible, so long as they're not "lavish or extravagant." So you tell us — does $795 for five courses of white truffles pass the test?

Nobody likes paying more tax than they have to, especially when they're paying 54%. But we understand the best tax plans are the ones that help you accomplish financial goals beyond a night out on the town. So call us when you're ready to save, and we'll give you something to celebrate!

Can You Imagine the Smell?

Last year's Tax Cuts and Jobs Act added a new red light. Specifically, it capped deductions for state and local tax deductions at $10,000 per year. That's an obvious blow to the states that reach the deepest into their residents' pockets. In New York, for example, one-third of taxpayers claimed the deduction, averaging more than $20,000. In Alabama, just one-fourth claimed it, averaging just $6,000.

Of course, human nature being what it is, we don't always want to stop at those red lights. So society has developed an entire profession, called "the law," dedicated to finding ways around them. (Even Pope Francis, when he announced the church's opposition to capital punishment, left exceptions for people who drive the speed limit in the left-hand lane or bring Popeye's fried chicken on an airplane.) 

Of course, our friends back in the Home Office in Washington aren't stupid. Last week, the Treasury Department issued proposed regulations effectively eliminating charitable deductions for gifts tied to state tax credits. But will that be the end of the story? Not if the states have their way, and they're sure to take the Treasury to court. Round and round it goes . . . and now you know why tax lawyers drive Jaguars!

IRS Loves "New" Math

  Parenting is full of all sorts of milestones. Some of them are precious, like your child's first steps, their first words, and their first day of school. Some of them are less welcome, like a first broken bone, or a visit from the law. But there's one milestone that takes some parents by surprise, and that's the day they realize they can't help their kid with math homework anymore. This is especially jarring when the kids come home insisting their teacher taught them 2+2=5. The "new" math can't be that different from the "old" math? It's still just math, right?

  Last week, a California lawsuit involving Monsanto Corporation's flagship product, Roundup weed killer, reveals how the new math of last year's tax law changes the rules. A San Francisco-area school groundskeeper named Dewayne Johnson, who sprayed up to 150 gallons of the pesticide at a time, sued Monsanto, claiming it gave him cancer. The jury agreed and awarded him $289 million, including $39 million in compensatory damages and $250 million in punitive damages. 

  Unfortunately for Johnson, he's not going to get to keep anywhere near that whole $289 million. He's going to run into some new math and wonder if maybe 2+2 doesn't somehow equal just one. 

   Here's the first problem: legal fees. Lots of attorneys go to law school because there's no math. But there's one calculation any ambulance chaser can do in his sleep, and that's take a third off the top. (The next time you meet one at a party, throw out an 11-digit prime number, and be amazed how fast you get back a response. Try it, it's fun!) We'll assume for this discussion that Johnson's lawyers take 40% in fees and expenses, or $115.6 million. That leaves him with $23.4 million net compensatory damages and $150 million in punitives. 

   That leads to the second problem: taxes. Compensatory damages are tax-free, so Johnson keeps his full $23.4 million there. And under the "old math," he could deduct the remaining $100 million in legal fees before paying tax on his $250 million in punitive damages. He'll be in the top 37% tax rate, meaning $55.5 million goes Uncle Sam. As a California resident, another $18 million goes to Sacramento. That leaves $95 million. That's a lot less than $289 million, of course. But it's still a pretty nice result, although we're guessing Johnson would rather get to "live" than "be rich." 

   Now here's where the "new math" upends those numbers. Last year's Tax Cuts and Jobs Act eliminates the deduction for legal fees related to punitive damages. So now Johnson pays the same $100 million to his lawyers, but still pays tax on it. That launches his tax bill up to $122.5 million and leaves him with just $50.9 million — less than 18% of the original award! 

  Of course, the IRS is delighted. They get to collect tax on that $100 million in legal fees for the punitive damages twice: once from Johnson who wins them and again from the lawyers who earn them. What's not to like from their perspective? 

  Now finally, here's the good part, at least for you. You don't have to know the first thing about new math to pay less tax. Our tax planning service gives you a pesticide that eliminates wasted taxes, with no unpleasant side effects. So call us when you're ready to save, and we'll see how "green" your garden grows

It Came From Under the Ground!

Earlier this month, archaeologists digging in Egypt unearthed a 2,000-year-old black granite sarcophagus 16 feet below the surface. Pretty cool, right? But then they announced they were going to open it. What a terribleidea! Have they never seen The Mummy? When the lid came off, they found three skeletons rotting in some dirty water that had probably leaked in from a nearby sewage trench. But that doesn't necessarily mean an ancient undead presence didn't manage to escape, too. It's not like they could actually see it!

Here's something even scarier than unleashing an ancient mummy's curse: wasting money on taxes you don't have to pay! Fortunately, you don't need to dig 16 feet down to discover the solution. All you need is a plan. So call us when you're ready to stop running from the undead beast, and see how much you can save!