Thou Shalt Not Sin?

It's no secret that Washington uses the tax code to do more than just raise revenue. Lawmakers also use it to influence some of our biggest financial decisions, with tax deductions for mortgage interest to encourage homeownership, tax credits for fuel-efficient cars to encourage conservation, and "bonus depreciation" to stimulate business spending. Washington seems to believe those incentives really work. And cynics argue that the real reason we'll never see a true flat tax is because lawmakers are loath to give up the power to regulate that comes with their power to tax.

Government also uses the tax code to sway some of our smaller decisions, too. This is especially true with so-called "sin taxes" -- essentially, fees we pay to consume unhealthy products or engage in unhealthy behaviors. As Adam Smith wrote in The Wealth of Nations, "sugar, rum and tobacco are commodities which are nowhere necessaries of life, which are become objects of universal consumption, and which are therefore extremely proper subjects of taxation."

230 years later, sugar, rum, and tobacco are still taxed. (In New York City, a pack of smokes comes with a hefty $6.86 in federal, state, and local taxes -- the tobacco is extra!) The 2010 health care reform slapped a 10% tax on tanning beds. Public health advocates have proposed taxes on fatty foods and sugary sodas to fight obesity. And many Americans, discouraged by what they see as a decades-long failure in the War on Drugs, call for legalizing drugs, taxing them to shift profits from private cartels, and using the revenue to fund anti-addiction efforts.

So, how effective are sin taxes at balancing their dual goals of raising revenue and discouraging unhealthy behavior? Well, federal and state tobacco taxes alone raise nearly $30 billion per year. They seem to do that job just fine. But some economists find that sin taxes send the wrong message by legitimizing the behavior they try to discourage. Here's what Harvard Professor Michael J. Sandel says in his new book, What Money Can't Buy: The Moral Limits of Markets:

"A study of some child-care centers in Israel shows how this can happen. The centers faced a familiar problem: parents came late to pick up their children. A teacher had to stay with the children until the tardy parents arrived. To solve this problem, the centers imposed a fine for late pickups. What do you suppose happened? Late pickups actually increased."

Clearly, telling parents "don't be late or we'll fine you" sends a very different message than telling them simply "don't be late." And so it goes with sin taxes, too. Telling smokers and drinkers "don't indulge or we'll tax you" offers them implicit forgiveness -- that it's actually OK to light up and enjoy two-for-one Happy Hour so long as they pay the fee. (If you're reading these words with a cigarette in one hand and a Red Bull in the other, you can breathe a sigh of relief!) It may sound hypocritical for Uncle Sam to wag his finger at you with one hand while he reaches into your pocket with the other. But sin taxes have been around a lot longer than income taxes, and they aren't going away.

 There's really no "planning" we can help you do to avoid sin taxes. (We would just give you the same advice as your mother.) But it may be worth it, next time you pay any tax, to ask yourself "what's the government trying to accomplish with this tax? What's the government trying to get me to do?" Understanding why you pay a tax can make you a better-informed consumer. And that, in turn, helps all your dollars go farther.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Tax Choices for Startups

Choosing which entity to operate your business involves two fundamental choices: 1) will you remain personally liable for business debts; 2) how will you and your business pay tax? There’s no “pat” answer, and in many cases you’ll want more than one entity. Consider these options as starting points:

• Proprietorship: This is a business you operate yourself, in your own name or trade name, with no partners or formal entity. You remain personally liable for business debts. You report income and expenses on your personal return and pay income and self-employment tax on your profits. These are best for startups and small businesses with no employees in industries with little legal liability.
• Partnership: This is an association of two or more partners. General partners (“GPs”) run the business and remain liable for partnership debts. Limited partners (“LPs”) invest capital, but don’t actively manage the business and aren’t liable for debts. The partnership files an informational return and passes income and expenses to partners. GP distributions are taxed as ordinary income and subject to self-employment tax; LP distributions are taxed as passive income.
• “C” Corporation: This is a separate legal person organized under state law. Your liability for business debts is generally limited to your investment in the corporation. The corporation files its own return, pays tax on profits, and chooses whether or not to pay dividends. Your salary is subject to income and employment tax; dividends are taxed at preferential rates. These are best for owners who need limited liability and want the broadest range of benefits.
• “S” Corporation: This is a corporation that elects not to pay tax itself. Instead, it files an informational return and passes income and losses through to shareholders according to their ownership. Your salary is subject to income and employment tax; pass-through profits are subject to ordinary income but not employment tax. These are best for businesses whose owners are active in the business and don’t need to accumulate capital for day-to-day operations.
• Limited Liability Company (“LLC”): This is an association of one or more “members” organized under state law. Your liability for business debts is limited to your investment in the company, and LLCs may offer the strongest asset protection of any entity. Single-member LLCs are taxed as proprietors, unless you elect to be taxed as a corporation. Multi-member LLCs choose to be taxed as partnerships or corporations. This flexibility and asset-protection strength makes LLCs the entity of choice for many new businesses.

If you expect your business to lose money at first, consider a proprietorship, LLC, or “S” corporation. Losses from these entities (up to your basis in the business) offset outside income from salaries, investments, and other businesses. If losses exceed that income, they generate net operating losses (“NOLs”) that you can carry back two years or forward 20.

Filing Guide

Proprietors and single-member LLCs file Schedule C then carry profits or losses to Form 1040. Partnerships and LLCs taxed as partnerships file Form 1065, then report partners’ income and expenses on Form K1 “C” corporations file Form 1120 or 1120-A. “S” corporations file Form 1120S, then report shareholder income and expenses on Form K1.

IRS Publication 334:
Tax Guide for Small Business
 
IRS Publication 535:
Business Expenses
 
IRS Publication 536:
Net Operating Losses
 
IRS Publication 583:
Starting a Business and Keeping Records

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Document Those Receipts

If your only income is through salary, dividends, interest, etc. you probably will have few worries about the IRS asserting you have unreported income. But if you or your spouse have a business, you've got to be able to document amounts received that are not business income.

For example, your spouse has a consulting business. You're taking a trip to a Germany and agree to purchase six cuckoo clocks for a friend for a total of $4,000. You use your credit card and upon returning your friend reimburses you the $4,000. You're later audited and the IRS claims the $4,000 you deposited in your personal bank account was unreported income from your business.

The first question is will you even remember what the $4,000 was for? If you pass that test, can you prove it? There are many income sources that may be difficult to prove; some are easy. A loan from relatives for your business. The repayment of a loan you made to your neighbor to start a business. The proceeds of a yard sale. The sale of an inherited art work.

At a bare minimum make some sort of diary entry to describe the source of the income. Copy the check before depositing the money. Retain any documentation such as a note that substantiates a loan, a bill of sale for an item, etc.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Is That 1099-C Correct?

In McCormack v. IRS, T.C.  Memo 2009-239, the Tax Court ruled that the IRS cannot rely on merely the fact that a Form  1099-C has been issued by a creditor, when the taxpayer has  made a good faith dispute of the amount due and owing, and there is then  a settlement reached between the parties to that dispute. 

The IRS must  do more than rely on the amounts set forth in the Form 1099-C.  Under  IRC Section 6201(d), in any court proceeding, if a taxpayer asserts a  reasonable dispute with respect to any item of income reported on an  information return and has fully cooperated with the IRS, the burden is  then on the IRS to produce reasonable and probative information  concerning a deficiency, in addition to the amount identified on the  information return. 

In the case, the taxpayers asserted reasonable  disputes as to the amounts reflected on Forms 1099-C, and the IRS failed  to produce reasonable and probative information independent of the  third party information returns.

While not at issue in the McCormack case, taxpayers need to know that there is a provision in the tax law  providing taxpayers with the right to be protected against the  fraudulent issuance of information returns.  Under Internal Revenue Code Section 7434 of the  Internal Revenue Code, civil damages can be assessed if any person  "willfully files a fraudulent information return with respect to  payments purported to be made to any other person."  Damages recoverable  are equal to the greater of $5,000 or the sum of any actual damages  sustained by the taxpayer as the proximate result of the fraudulent  information return, including any costs attributable to resolving the  deficiencies asserted as a result of such filing, plus the costs of the  action, and in the court's discretion, reasonable attorney's fees

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. Counseling Entrepreneurs, Professionals and Select Individuals who are struggling with ever changing tax laws and who are paying too much in taxes. All the while he is protecting his clients from the IRS and other taxing authorities using proactive tax planning strategies, ensuring compliance with minimal tax liability.

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. 

Green Apple

For 20 years now, Apple has blazed a reputation for stylish design and innovative products, creating a near-cult following among fans. Apple's computers appeal to the artists and designers who set so many of today's trends. Their iPod has helped change how the world listens to music. Their iPad has made online content available nearly anywhere. And their iPhone is helping change the way we communicate with friends, family, and colleagues. (Just a few years ago, your mother-in-law didn't have a cell phone. Now she sends text messages and "checks in" on Facebook.)

Apple may be the most successful company on earth. At one point last year, they had more cash on hand ($76.2 billion) than the United States government ($73.8 billion). And Apple is currently the most valuable company on the planet, with a "market cap" (total value of tradeable shares) that topped $590 billion dollars on April 10. (That's right . . . those iTunes you casually download for a buck each have created a company worth over half a trillion dollars.) In fact, Apple's current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand -- combined.

But Apple's most recent annual report reveals the company's genius for creating successful marketing strategies also extends to successful tax strategies. How else would you describe a strategy that lets Apple earn billions and pays less than 10% of their taxable income in tax?

How do they do it? Largely by keeping the money they earn outside the United States, outside the United States. Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the "Double Irish with a Dutch Sandwich" strategy that hundreds of other multinational companies have imitated. Apple even maintains a subsidiary in tax-free Nevada -- the blandly-named "Braeburn Capital" -- to manage that enormous cash haul without paying tax in its home state of California. For 2011, the company paid a worldwide tax of $3.3 billion on $34.2 billion of profit. But one study concludes that Apple would have paid $2.4 billion more without these rules.

Now Apple has become part of the political debate. At the risk of grossly oversimplifying a pretty complicated discussion, Democrats in Washington scoff that taking an extra $2.4 billion in tax last year would have squelched Apple's creativity. Republicans reply that using the cash to grow the business or distribute more dividends to shareholders will grow the economy faster than if it goes to the IRS. Both President Obama and presumed Republican nominee Mitt Romney have called for eliminating corporate tax loopholes in order to pay for lower rates (28% in President Obama's plan, 25% in Governor Romney's). Either way, Apple is likely to become one of the stories -- like Warren Buffett paying a higher tax rate than his secretary -- that come to define this year's campaign.

Taxes always play a part in Presidential races. But this time, with the economy still struggling and the Bush tax cuts scheduled to expire in a few short months, taxes will be even more important than usual. Our job, as November approaches, includes helping you understand just what the candidates' proposals mean for your bottom line. So keep up with these emails -- and if you're curious how any of the proposals you hear about would affect your plan, call us!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

To Pay Or Not To Pay

One scam that's effective is to send phony bills to businesses. Small businesses can be vulnerable because no one has the time to check with the boss or research the invoice. If there's any doubt as to the amount or validity of the bill, it should be checked. But it shouldn't hold up processing other invoices.

While the bills can be true scams from companies that provide no services and/or ones you never dealt with, they can also come from vendors who just continue to bill you for services that you may no longer need. For example, you decided to cancel the service contract on the forklift you now rarely use, or the copy machine that's been relegated to a corner of the warehouse. And make sure you have a system for not paying the same invoice twice.

Automatically paying invoices can be costly. Having a policy of reviewing them can also allow you to reconsider expenditures that you may no longer need. And individuals are not immune. Scammers have used the same approach on individuals for extended warranties, etc.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Business Recordkeeping

In David A. Olagunju et ux. (T.C. Memo. 2012-119) the taxpayer was denied deductions for a number of items because he could not substantiate the deductions.

The Court disallowed travel expenses for one of the taxpayer's businesses between New Jersey and Washington because the taxpayer owned houses in both locations and he did not show the business reason for the travel to Washington. The Court disallowed a deduction for checks written to organizations where there was no clear business purpose. The Court disallowed rent expense where the taxpayer could not produce a lease on the premises.

The Court also questioned the credibility and authenticity of the taxpayers' cash receipts where the handwriting on them matches the handwriting on some other receipts issued by different vendors. The Court also disallowed certain other handwritten invoices.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Chimpanzees and Charity

Disneynature's newest movie, Chimpanzee, is a documentary masterpiece for all ages. It's a truly original film that stands out in a multiplex of lookalikes, copies, remakes, and sequels. And Chimpanzee's cinematography is amazing -- the simple beauty of the jungles and the animals stands in contrast to so many of today's movies all tricked out with 3D gimmicks and computer-generated special effects.

Filmmakers spent four years "embedded" in the lush rainforest of Ivory Coast's Tai National Park to make the movie, which follows the life of "Oscar," a predictably adorable young chimp. Oscar learns how to use rocks to open nuts (apparently harder than it looks) and use sticks to go "fishing" for army ants (apparently a real delicacy to chimpanzee foodies). There's a turf war with a rival community for control over a valuable nut grove. And, this being a Disney movie, Oscar loses his mother to a leopard around the beginning of the third reel. (It's handled sensitively -- there's nothing to terrify children or grandchildren in the audience.) Losing his mother poses a real threat to Oscar's life, until, remarkably, he's "adopted" by Freddy, the community's alpha male. The film is narrated by Tim Allen, whom even the youngest viewers will recognize as the voice of "Buzz Lightyear" from Disney/Pixar's mega-successful Toy Story series.

Primatologists have suspected that chimpanzees like Freddy might altruistically adopt orphaned young in their group. But this is the first example of such behavior actually caught on film. (There's no word on whether Freddy "taxed" the rest of the community for the expenses of caring for Oscar, or whether "tax avoidance" is part of their natural behavior!)

Disney has announced that they are donating a portion of Chimpanzee's opening-weekend ticket sales to the Jane Goodall Institute for the "See Chimpanzee, Save Chimpanzee" program to protect habitats. Disney will donate 20 cents for every ticket sold, with a minimum donation of $100,000. (The movie grossed $10.2 million over its opening weekend, the highest opening gross in history for any nature documentary.) So -- and here at last we come to the tax question of the day -- does that mean that if you were one of the first to see it, you can deduct part of your ticket?

Unfortunately, no, that's not how it works. You got your "money's worth" from the movie itself, although Disneynature can certainly deduct the contribution on its return. It's like buying a ticket to a college football game. The college itself may be a not-for-profit organization -- but buying a ticket isn't a "donation" because you get something of value in exchange. (Some colleges let you make donations in exchange for the right to buy season tickets -- in those cases, the IRS treats that "right" as being worth 20% of the donation amount and lets you deduct the remaining 80%.)

Deductions for charitable contributions are a mainstay of the tax code. Charitable contributions let you do well for society while you do well for yourself -- which of course is something we want to help with, too! We can help you maximize deductions for gifts of used clothing and household accessories. We can help you plan for bigger gifts of cash, cars or boats, art or antiques, appreciated securities, real estate, and even life insurance. And don't forget, we're here for the rest of your "community," too!

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.

Removal of Tax Lien From Credit Report

New IRS procedures allow for the taxpayer to file an Application for a Withdrawal of a Federal Tax Lien (Form 12277) after the debt has been paid in full. 

The advantage of a Withdrawal, rather than merely a Release, which is always filed when the tax is paid, is that from a credit standpoint, the Withdrawal acts as if the Federal Tax Lien was never filed in the first place.  The removal of the Federal Tax Lien from your credit report should increase your overall credit score.

There is a specific way the form should be completed.  If you have a Federal Tax Lien on your credit report, please contact us.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes and understand their financial affairs. Discover how we can help you with your business and tax challenges; call me at (954) 591-8290 or drop me a note.

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Do Skinny Cows Make Lowfat Cheese?

The California Milk Advisory Board is an agency of the California Department of Food and Agriculture dedicated to promoting California dairy products. You've probably never heard of the Board. But we'll bet you've seen their television spots, with their catchy slogan: "Great cheese comes from happy cows. Happy cows come from California."

Now, The Atlantic magazine reports that landowners on the other side of the country are saving millions in tax by taking advantage of "America's Dumbest Tax Loophole: The Florida Rent-a-Cow Scam." But are those Florida cows as happy as their cousins in California?

Here's how it works. Florida's "greenbelt law" aims to help preserve farmland by taxing it according to its agricultural-use value, rather than its (higher) potential development value. To qualify, you just have to file a four-page application and convince your county tax appraiser that you're using the land for "bona fide" agricultural purposes. You don't even have to make an actual income from your "farming" in order to lower the valuation on your property. Pretty sweet so far, right?

But what if you're not even really a farmer? What if you're a rich developer, with land just sitting idle that you're getting ready to build on, and you want to get in on the party? No problem! Lease your land to a nearby cattle rancher, plop a few cows in what's left of the grass, and start saving big! Some landowners let ranchers graze their cattle for free. But the tax breaks are so rich and creamy that some landowners actually pay the ranchers to graze their cows, justifying the "rent-a-cow" nickname.

At this point, you're probably scoffing this is . . . well, udderly ridiculous. Au contraire, my naive friend, au contraire!

The Miami Herald reported back in 2005 that over two-thirds of the greenbelt law's biggest beneficiaries aren't true farmers. Developer Armando Codina saved $250,273 in 2004 by grazing cattle on land he owned in northwest Miami-Dade County while he built industrial warehouses on it. Then he asked the county to declare his "ranch" to be an environmentally contaminated "brownfield," while he still had cows on the land! (That had to make the cows happy.) Developer Richard Bell saved $140,168 that same year by grazing 16 cows on a 49-acre tract where he planned to build million-dollar McMansions. Even U.S. Senator Bill Nelson got in on the act -- he keeps "about six cows" on 55 acres of property near the Indian River and saves $43,000 per year. The Herald found "skinny" and "underfed" cows eating garbage and grazing on bare, rocky land throughout the state.

Developers confess that this may not have been exactly what the Florida Legislature intended when they passed the greenbelt law back in 1959. But they argue that vacant land shouldn't be taxed at full value if it's just aging till ripeness. And they point out that once the land is developed, new homes and offices generate plenty of tax revenue.

We have no clue if the Florida cows are as happy as the California cows. Nor can we tell you if their cheese is any good. But we can tell you that you don't have to go to such ridiculous lengths to save big on your income taxes. The tax code is full of legitimate deductions, credits, and opportunities that serve legitimate public goals. And it's our job to help put all those opportunities to work for you.

If you have any questions about this topic, tax law changes, business tips, or how to become a client, please call us at 954-591-8290 or use our Contact form.