Tax Strategies for Santa Claus

by Kenneth Hoffman in , ,

As 2012 draws to a close, most of us are preparing to take time off and enjoy friends and family. But there's one famous name who works harder than any one else this time of year -- everyone's favorite fat man in a red suit, Santa Claus.

When you think of Santa, you probably focus on what he gives. But have you ever thought about what he pays? You can be sure the grinches at the IRS do!

Santa is most famous for his holiday gift-giving. His "North Pole Foundation" is set up as a not-for-profit under Internal Revenue Code Section 501(c)(3). But Santa also operates a second, highly profitable business focused on licensing and endorsements. (In that sense, he's like top athletes whose off-the-field income from endorsements far outstrips their on-field earnings.) So how can Santa shelter some of his own presents?

Fortunately, Santa can take advantage of many of the same deductions as any other business owner. Those include:

  • Mileage. Santa can choose to deduct "actual expenses" (maintenance, upkeep and depreciation on the sleigh, reindeer chow, etc.) or the standard allowance (currently 55.5 cents per mile). In Santa's case, the sheer length of his trip around the globe to deliver toys to all the good little girls and boys makes the allowance his best bet. (His sleigh also qualifies as "energy efficient" -- it's 100% "green," running entirely on reindeer power, and even Rudolph's nose is low-wattage.)
  • Uniforms and work clothes. Clothing Santa provides for himself and his elves are deductible so long as they're not "suitable for ordinary street wear." This time of year it seems like everyone enjoys a red coat and hat. Still, we feel confident Santa's classic look is distinctive enough to pass the IRS test.
  • Home office. Home offices are deductible so long as they're used "regularly and exclusively" for work and constitute the "principal place of business." Santa's North Pole workshop certainly qualifies, which means he can write off depreciation, utilities, cleaning and maintenance, and holiday decorations. Code Section 132(j)(4) even lets him deduct an "on-premises employee athletic facilities" for hosting reindeer games.
  • Retirement. Santa sure seems to love his job now. But how will he feel about his long night's work as he ages? He'll probably want to stuff some cheer in his own stocking. The problem is those naughty nondiscrimination rules that force him to contribute on behalf of his elves, too. We recommend a "safe harbor" 401(k) to maximize his own contributions without letting the plan become as "top-heavy" as his sleigh.
  • Family employment. It's not clear if Mrs. Claus holds a formal position in Santa's organization. However, putting her "on the books" would let Santa boost the couple's qualified plan contributions. Perhaps he might even establish a Section 105 medical expense reimbursement plan to write off his cholesterol medication as a business expense.

This holiday season, we wish you and your family all the best. And remember, we're here for all your year-end tax questions -- unlike Santa, we don't quit after the holiday!

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday between 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and  please share it on twitter, facebook or your favorite social media site and  with your friends, family and colleagues. Thank you.