June 4, 2014

Really?

by Kenneth Hoffman in Charitable Contributions, Tax Counsel, Tax Planning

Why did Willie Sutton rob banks? Because that's where the money is, of course. Why does the IRS focus its attention on income taxes? Same reason! For fiscal 2014, they expect to collect $3 trillion in taxes: $1.4 trillion in individual income taxes, $1.0 trillion in Social Security and Medicare, $332.7 billion in corporate income tax, $154 billion in transportation and excise taxes, and "just" $15 billion in gift & estate taxes. Three trillion dollars sounds like it ought to be enough to finance the government. But of course it's not. So our friends in Washington are constantly searching for more change in the national couch cushions. (Value-added tax, anyone? Carbon tax?) And now it looks like they may have found the mother lode. Would you believe they're finally coming after your frequent flyer miles?

The first frequent-flyer program took off back in 1972. Since then, nearly every airline has launched one, and hotel chains have climbed aboard, too. Loyalty programs are so popular that over half of all credit card purchases made in the U.S. are made with cards tied to loyalty programs. That's especially astonishing when you consider how cramped the airlines have made their seats and how many "junk fees" they've loaded up on — for checked bags, overhead bin space, curbside check-in . . . the list goes on and on. (Michael O'Leary, head of Ireland's Ryanair, actually proposed charging to use the loo.)

The IRS recognizes six kinds of frequent flyer miles, and taxes them according to how you receive them. These include:

Miles awarded for travel (nontaxable)
Miles awarded for credit card use (nontaxable)
Miles awarded in connection with business travel (nontaxable but mainly because it would be too hard to track)
Miles awarded for opening an account (taxable)
Miles awarded for putting money in a mutual fund (which reduces your tax basis in the fund)
Miles awarded as prizes (taxable)

For the most part, those rules make sense. (Would it really be worth the hassle to require business travelers to report the value of frequent-flyer points they redeem for personal travel?) But now it appears that change is on the radar. Last August, the Service released its 2013-2014 "Priority Guidance Plan" that included a project modifying the accounting rules for loyalty programs. And last month, a group of four major travel associations sent a letter to Treasury Secretary Jack Lew urging him to reject any changes to those rules.

It may be that changing the way the IRS treats loyalty programs at the airline level doesn't necessarily mean taxing the awards they grant their members. But does anyone doubt that airlines — who now charge for luxuries like pillows and blankets — will pass any new tax costs through to passengers? (If we're lucky, the new tax will arrive as late as your last flight did!)

We realize the prospect of taxing your frequent flyer miles doesn't keep you awake at night. But make no mistake about it, Washington is looking for new ways to pay for government. Pilots never take off without filing a flight plan — so why would you try to manage your finances without a tax plan? Call us for that plan, and you might be upgrading your next seat to first class!

Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. As a trusted senior advisor and counselor working closely with Entrepreneurs, Professionals and Select Individuals, Mr. Hoffman provides counsel to his clients who are navigating through the complexity of today's business, tax, and accounting challenges.

Click here to schedule an appointment with Kenneth Hoffman.

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

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

May 28, 2014

Tax Man Asks "What's On the Grill?"

by Kenneth Hoffman in Tax Planning, Tax Counsel

If you're like millions of Americans, you spent last weekend welcoming the unofficial start of summer. (Time to start wearing white again!) You might have enjoyed a day at the pool, a game of tennis, or a round of golf. You may have even hosted a backyard barbecue. If so, you probably didn't realize that serving fancy fare like lobster or crabcakes would impress the tax man as well as your guests — at least, if you live in England.

Across "the pond," Her Majesty's Revenue & Customs is the equivalent of our IRS, charged with collecting the taxes that pay for royal kibble for the Queen's royal corgis. And just as here in the former colonies, there's a "tax gap" between what officials believe they should be collecting and what they actually get. In England's case, that difference is about £35 billion (a spot under $60 billion depending on the exchange rate).

HMRC has already drawn heat for going all "Big Brother" in their efforts to ferret out tax evaders. Last year, they announced a new program to use credit checks to find suspected tax cheats. The goal is to cross-check what people report on their tax returns against they actually spend. Officials started with a pilot program involving 20,000 people — and they expect to expand it to as many as two million. (Blimey!)

But now they're going even farther. Now they're using images from Google Earth and Google Street View (for that all-important "kerbside" look) to literally spy on homes to trap suspected tax cheats! Are you paying proper tax on your home improvements as you've described them on tax forms? Are you paying enough tax on all the cars parked in your driveway? Presumably, if the images of your lawn party are detailed enough to distinguish between ordinary bangers and high-end potted shrimp, they'll use that against you too!

And what are they doing with those images? Four years ago, they dropped £50 million on a supercomputer named "Connect" to help decide who to investigate. According to the Daily Mail, it already holds more than a billion records, including "tax payment records, interest on bank accounts, details of any properties owned, loans, job history and electoral records." Bragging about your new car or your "trip of a lifetime" on Facebook can also trigger unwelcome attention.

Back here in the states, our National Security Agency's wholesale snooping in the name of fighting terrorism ignited a row of protest — and that was nothing compared to what HMRC freely admits doing, just in the pursuit of a few bloody quid. Can you imagine the outcry if, say, the reporters who helped break the Edward Snowden story discovered the IRS was analyzing credit scores and voting records to help decide who to audit?
(In related news, the latest trend among the Russian oligarchs, Arab sheiks, and ordinary billionaires who have made London the world's hottest real-estate market is excavating luxury basements with swimming pools, ballrooms, and gymnasiums. They say they're going underground because there's just no place else to build — but avoiding the tax man's probing electronic eye can't hurt, either!)

Well, old chap, what should we make of all this? The happy news is that you don't need to hide from satellites if paying tax isn't your cup of tea. You just need a plan — and it's our job to give you that plan. Call us now, and we'll have it in place before you put away the whites on Labour Day!

Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. As a trusted senior advisor and counselor working closely with Entrepreneurs, Professionals and Select Individuals, Mr. Hoffman provides counsel to his clients who are navigating through the complexity of today's business, tax, and accounting challenges.

Click here to schedule an appointment with Kenneth Hoffman.

May 21, 2014

Ooops!

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Politicians in Iowa, like politicians everywhere, want to encourage their local economy to grow. (Happy voters lead directly to reelection, of course.) But back in 2008, construction in Iowa, like construction everywhere, had slowed because of the recession. So the Hawkeye state's legislators did what they thought was a smart thing. As part of an overall reform that raised the sales tax rate from 5% to 6%, they streamlined the rules regarding heavy construction equipment. Specifically, they said that sales would be subject to the equipment excise tax — but rentals and leases would not. Makes sense, right? Why make construction more expensive by imposing a sales tax on folks who aren't actually buying the equipment they use?

Since then, the Iowa Department of Revenue has collected more than $20 million in tax on equipment sales. Nobody paid any special attention to the new rules — at least, until last summer. That's when a curious attorney for an equipment buyer contacted the Department with the unwelcome news that the legislature had streamlined the tax a little too well. In fact, the language of that legislation had accidentally repealed it entirely!

And nobody noticed. Not the staffers who wrote the law. Not the legislators who introduced it into the statehouse, marked it up, and passed it. Not the governor who signed it. Not the 185 or so equipment vendors who mistakenly collected the tax on behalf of the state. And certainly not the Department of Revenue who happily took the vendors' deposits, year after year after year.

Oops. "I think you call that a mess," said Rep. Tom Sands, Chair of the Iowa House Ways & Means Committee.

What could Iowa do? Honoring the mistake would mean paying back $20-30 million in taxes and interest, plus giving up $7 million more every year going forward. That may sound like a drop in the bucket compared to the state's overall $15 billion budget. But in today's tight economy, every bit counts.

The legislators who accidentally repealed the tax probably would have preferred to ignore the whole thing and hope that nobody noticed. (Insert your own joke about political cover-ups here.) But once that lawyer discovered their goof, the game was up. So they did something any golfer understands. They took a mulligan! On March 10, the Iowa House voted 95-0 to pass a "technical administration" bill reinstating the tax, retroactive all the way back to 2008. On March 27, the state Senate concurred, 26-21. And on April 10, Governor Branstad signed it into law.

So, does it count as "raising taxes" to pass a bill retroactively reinstating a tax you never meant to repeal in the first place?

When a tree falls in the forest and no one is around to hear it, does it make a sound?

You probably shouldn't hold your breath waiting for Congress to accidentally repeal the Internal Revenue Code. Fortunately, you don't need that sort of foulup to pay less. You just need a plan — a blueprint for taking advantage of all the deductions, credits, loopholes, and strategies you're legally entitled to. So call us when you're ready for that plan, and see what we can construct for you!

Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.

May 14, 2014

From Russia With Love

by Kenneth Hoffman in Business Counsel, Tax Counsel

The former Soviet republic of Ukraine has become the world's hottest military and diplomatic flashpoint as Ukrainian nationalists face off against pro-Russian separatists. Russian President Vladimir Putin courteously waited until after the Sochi Olympics to seize Crimea, then position troops throughout eastern Ukraine. Now he's announced he'll withdraw the troops he denied dispatching in the first place. But sabers are rattling, and the situation is so volatile that combat could explode before you finish reading this email.

The United States obviously wants to avoid that possibility. But Secretary of State John Kerry's best efforts appear to be having little effect. We're certainly not going to involve our own military anytime soon. Even James Bond himself would be hard-pressed to parachute in with a solution. So, who can we turn to? Well, how about those stalwarts of democracy at the IRS?

Back in 2010, Washington passed the Foreign Account Tax Compliance Act ("FATCA") to stop tax evaders from parking assets in secret foreign accounts. (Add another "t" to that acronym and you'll see who it's aimed at!) That law requires all foreign banks to spill the beans on American accounts with more than $50,000. If they don't, starting July 1, they'll have to withhold 30% of the interest and dividend payments their clients earn on most U.S. stocks and bonds.

Almost 50 countries have agreed to let their banks participate and avoid that penalty. That list includes traditionally "sunny places for shady people" like the Cayman Islands. But guess who still says nyet? That's right, Russia. What's worse, Russia's bank secrecy laws prevent banks from going around the country and working directly with our Treasury. And even worse, at least for Putin and his henchmen, our Treasury suspended negotiations entirely when Russia rolled into Crimea.

At this point, then, it looks like law will make it way more expensive for investors to use Russian banks to invest in the U.S. And private investors who use Russian banks to facilitate trades are also subject to the law. It gets worse in 2017 — if there's still no agreement in place, banks will have to withhold 30% of the gross proceeds of stock and bond sales, on top of the interest and dividends they earn.

FATCA may not be the only way to marshal the power of taxes against Russia. Putin's cronies — the billionaires who own Russia's biggest oil, gas, mining, and retail companies — have moved tens of billions of dollars of assets out of Russia and into western jurisdictions like Luxembourg, the Netherlands, and Switzerland. They did so to dodge Russian taxes (apparently, ex-commies resent paying them as much as any other capitalists). But now they find their assets exposed to possible U.S. sanctions and vulnerable to freezes. It's probably too soon to break out the balalaikas and celebrate — but we can hope that the risk of losing their assets motivates the oligarchs to pressure Putin to pull back.

Closer to home, we help you pay less tax on your investments. Fortunately, you don't have to risk international sanctions to do it! You just need a plan. So call us for that plan, and save a bunch of rubles on your bill!

May 8, 2014

Nice Mouth

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Two weeks ago, few Americans had heard of Los Angeles Clippers owner Donald Sterling. Now, thanks to Sterling's big mouth, we're all talking about him. As President Barack Obama said, "when ignorant folks want to advertise their ignorance you don’t really have to do anything, you just let them talk. And that’s what happened here."

National Basketball Association commissioner Adam Silver wasted no time banning Sterling from the league for the rest of life. (No communication with players, coaches, or staff. No practices or games. No owner meetings at cushy resorts or other league activities of any kind.) He announced he would urge the league's Board of Governors to force Sterling to sell the team. And he fined Sterling the maximum $2.5 million allowed by the league constitution.

At first glance, $2.5 million sounds like a mere technical foul for a guy with Sterling's wealth. (Forbes estimates his total net worth at $1.8 billion.) But the real cost of Sterling's words may turn out to be $100 million or more. Where does that extra penalty come from? Thank our friends at the IRS, of course.

Sterling bought the team in 1981 for just $12.5 million. According to the Wall Street Journal, it's worth $700 million or more today. We'll assume for the purposes of this discussion that Sterling could sell it for $700 million.

If Sterling holds onto the team until his death, his estate will owe Uncle Sam 40% on the $700 million. The $280 million tax will leave his heirs with just $420 million. That's a big bite, of course. But the heirs will take the team with a "stepped-up basis" equal to the full $700 million. In other words, they avoid tax on the full difference between the $12.5 million purchase and the $700 million value.

Now let's say Sterling's fellow NBA owners force him to sell. Sterling will owe 20% federal capital gain tax on his $687.5 million gain (the $700 million selling price minus his $12.5 million "basis.") He'll owe the new 3.8% "unearned income Medicare contribution" on the same amount. And, as a California resident, he'll owe the Golden State another 13.3%. The California tax is deductible from his federal income. Still, all told, he'll pay in the neighborhood of $230 million on his gain. Talk about fouling out!

Those tax hits will leave Sterling with just $468 out of the team's $700 million. At his death, estate taxes will take another $187.2 million, leaving his heirs with just $280.8 million. That's nearly $140 million less than if he had held the team until his death.

As bad as $140 million sounds, the real penalty could climb even higher. The team's television contract expires after the 2015-16 season, which could mean hundreds of millions in new revenue from a more lucrative replacement contract. Plus, celebrities from NBA great Magic Johnson to rapper-entrepreneur Sean "Diddy" Combs, and even Oprah Winfrey have announced interest in buying the team. That sort of financial jump shot could push the price to well over a billion dollars.

Selling appreciated assets like stocks, mutual funds, real estate, or a business can feel like striking it rich. But you can't forget that your friends at the IRS are waiting to share your good fortune, too. That's why it's crucial to have a plan to minimize your tax when you sell. And that, of course, is where we come in. So call us before you sell, and remember, it's what you keep that counts.

April 30, 2014

Toby Keith's "I Love This Tax Problem"

by Kenneth Hoffman in Tax Planning, Tax Counsel

In 2003, country music superstar Toby Keith released "I Love This Bar," the first single from his Shock'n Y'All album. (For those of you under age 25 or so, an "album" is . . . oh, never mind.) Billboard predicted the song would become "a beer-joint staple for years to come," and it promptly shot to #1 on the charts, selling over a million copies.

"I Love This Bar" is just one of Keith's odes to drinking — he's also scored hits with "Whiskey Girl," "Get Drunk and Be Somebody," and "Get My Drink On." "Red Solo Cup," his 2011 smash, made the red plastic cups the symbol of "party time" for the under-30 set. Naturally, with that sort of appeal, Keith had to open a bar of his own. Singer-songwriter Jimmy Buffet pioneered the concept, opening dozens of tourist traps Margaritavilles anywhere middle-aged men of a certain disposition gather to recall their youth. If Jimmy can do it, why can't Toby?

And so it came to pass that there are now fifteen Toby Keith's I Love This Bar & Grill locations from sea to shining sea. Keith's namesake joints feature guitar-shaped bars, beer served in mason jars (just like in the song), and elegant southern fare like chicken-fried chicken (?), fried bologna sandwiches (!), and deep-fried twinkies (!!). You'll find them plunked down in cities across our fair land, including such traditional country-music strongholds as Boston, Detroit, Cincinnati, and even Syracuse.

It's that last location in upstate New York — 1,400 miles from Keith's hometown of Norman, Oklahoma — that brings us to our story. You'd think the guy who sang "Beer for My Horses" with Willie Nelson would have no problem turning a profit with sales from a bar packed with thirsty fans. But apparently, you'd be wrong. The New York Department of Taxation and Finance has just hit the store with a "tax warrant" for $189,392.17 in unpaid sales taxes. The warrant lets the state levy the business' bank account or even seize the business entirely. (The restaurant remains open for now, as officials seem to think they have a better job collecting if they don't kill their golden goose. Phew!)

Bars and restaurants are notoriously risky businesses, even with "can't miss" concepts like "I Love This Bar." (If you think rising meat and cheese prices are hitting your wallet hard, just imagine what happens when you're feeding thousands of fans a month!) Restaurant owners who find themselves in trouble can be tempted to "borrow" from the government by hanging on to taxes they collect on behalf of customers and employees. The problem, unfortunately, is that every day they continue, they fall deeper and deeper into the hole — and sometimes they never dig back out.

Keith's restaurant may be struggling. But the singer himself isn't having any money problems. Forbes magazine has called him "Country's $500 Million Man," and "a one-man cash machine." He owns a liquor company, a record label, and a golf course. There's even an eight-passenger Learjet, painted in Oklahoma Sooner crimson and cream, outfitted with saddle-leather seats. But one thing Keith doesn't own is "his" restaurant in New York. While he does own chunks of the first few locations, he generally just licenses the newer locations to outside operators in exchange for a piece of the gross.

We realize few of you could imagine making millions selling fried bologna sandwiches. But we can imagine how unhappy you'd be if word leaked out that you owed enough tax to pay for an entire house! That's why we work so hard to help you plan to pay less. So call us if you'd rather spend your money treating your friends to a round of drinks. And remember, we're here for them, too!

April 23, 2014

The New Known Unknown

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Donald Rumsfeld may be one of the most controversial figures of our time, but you have to respect his resume. He won a seat in Congress at an age (30) when some of today's college graduates are still living in their parents' basements. He served as the youngest Secretary of Defense in American history (under President Ford) and the oldest Secretary of Defense in American history (under Bush #43). Between those positions, he headed G.D. Searle, General Instrument Corporation, and Gilead Sciences, Inc. Those corporate posts helped make Rumsfeld the second-richest member of Bush's cabinet, with a net worth north of $62 million.

Rumsfeld is also known for his unique, sometimes blunt and sometimes slippery, speaking style. Who can forget this response he gave a reporter who asked him about the lack of evidence tying Saddam Hussein's Iraqi government to weapons of mass destruction?

"[A]s we know, there are known knowns; there are things that we know that we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns, the ones we don't know we don't know."

Rumsfeld's quote has been roundly mocked, and even has its own Wikipedia page. But now he's weighed in on a new "known unknown" that we all can support. We're referring, of course, to the letter he sent on April 15, addressed to "Sir or Madame" at the IRS:

"I have sent in our federal income tax and our gift tax returns for 2013. As in previous years, it is important for you to know that I have absolutely no idea whether our tax returns and our tax payments are accurate. I say that despite the fact that I am a college graduate and I tried hard to make sure our tax returns are accurate."

Four paragraphs later, you have to wonder if he's being snide or sad about the whole exercise:

"I do hope that at some point in my lifetime, and I am now in my 80s, so there are not many years left, the U.S. government will simplify the U.S. tax code so that those citizens who sincerely want to pay what they should, are able to do it right, and know that they have done it right."

At this point, a cynic might reply that Rumsfeld can find "tax simplification" hiding in the same place as Saddam's weapons of mass destruction. But cynicism aside, if Rumsfeld really wants to see tax simplification, he should write to his former colleagues in Congress. They're the ones who wrote the 2,600-page monstrosity known as "the tax code" that gives him such fits. And one remedy he could pursue in the meantime is to sit down for a plan. We would be happy to show him how he can pay less on his income from speaking fees, memoirs, and investments. Of course, if Rumsfeld doesn't come knocking, that means more time for you. So call us about your "unknown unknowns," if you think you paid too much on April 15!

April 16, 2014

Master This Green!

by Kenneth Hoffman in Business Ideas, Tax Counsel, Tax Planning

The calendar may say that spring officially begins on March 21. But for millions of golfers across the country, the season didn't really start until this weekend — specifically, when Bubba Watson outplayed 20-year-old phenom Jordan Spieth to claim his second green jacket at the 2014 Masters.

Augusta National Country Club, home of the Masters, is America's temple of golf. Augusta's "perennial ryegrass" fairways are manicured to a smoother finish than your living room carpet, and its greens are so hard and fast you could play billiards on them. So, with all that lush green stretching as far as the eye can see, would it surprise you to learn that the residents of Augusta have "mastered" a lucrative tax break? It's become so identified with the legendary golf tournament that it's known as "the Augusta rule." But if you own your own business, you may be able to take advantage of it yourself.

Augusta, Georgia, is a small city with about 200,000 year-round residents. But for the second week of April every year, it becomes the center of the sports universe. Wealthy golfers descend upon the town from around the world. They want quality accommodations. But the nearest Ritz-Carlton is a looong drive away. (81 miles, to be exact. You don't even want to know what par that is.)

For many of those fans, the answer is to rent a house in town, just a chip shot from the tournament. Augusta National and the Augusta Metro Chamber of Commerce have even teamed up to create the Masters Housing Bureau to pitch week-long rentals — for up to $40,000. For lots of Augusta homeowners, that's a hole in one! (Of course, homeowners outside Augusta have taken advantage of the same rule for events like the Olympic games, the Final Four, and the Super Bowl.)

Now, ordinarily the IRS would take a big divot out of that $40,000 windfall. (Pro golfers typically tip their caddies 10% of their winnings, and if you think that's enough for Uncle Sam, think again!) But here's where the Augusta rule comes in. Code Section 280(A)(g)(2) provides that if you rent your home (or vacation home) for less than 15 days a year, there's no tax due on that income. In fact, IRS Publication 527 says you shouldn't even report it. So, if you have a house in Augusta, you've got that going for you! Which is nice.

Don't have a house in Augusta? Don't despair! Let's say you own your own business, and you want to host a customer appreciation event. You could hold it at your house and deduct the cost of meals and entertainment you provide for your customers. But the Augusta rule also lets you rent your home to your business — for a commercially reasonable "fair market value," of course. Your business will deduct the rent it pays, which gives you a birdie on your tax bill. But so long as you don't do it more than 14 days per year, you won't have to report the income on your personal return. Pretty slick, right?

If you're a golfer, you've almost certainly dreamed of someday playing Augusta. But you wouldn't dream of doing it without an experienced caddy — because, when you sign that scorecard, you want as few strokes as possible. When it comes to taxes, that's our job. We give you the plan you need, so that when you sign your 1040 . . . well, you get the picture. So call us before you "hit the course." And remember, we're here for the rest of your foursome as well!

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

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC.

Follow us on Twitter at @TaxReturnCoach, and let us know how we're doing.

April 10, 2014

Fall into a Fortune

by Kenneth Hoffman in Tax Counsel, Tax Planning

Getting an audit notice is never anyone's idea of fun. But getting audited isn't always the disaster it might seem. In fact, for fiscal 2012, 107,820 lucky winners got refunds after their audits. Granted, that's still shy of seven percent of everyone audited that year. But it proves you can walk away from the IRS a winner.

Here's a clever strategy one taxpayer used to walk away from the IRS with a windfall. But you might want to be careful before you try it yourself!

William Berroyer owned an HVAC contracting company on Long Island. On July 3, 2008, he met with the IRS at their Hauppauge office to discuss a $60,000 payroll tax bill he owed on behalf of his business. The agent in charge of his case directed Berroyer to a conference table, where he nervously worked out a payment plan. As he stood up to leave, he twisted his foot in about 15 feet of telephone cord, spun around, hit a metal file cabinet, and landed flat on the floor.

At first he said he felt fine — he just wanted to get out of that conference room and back to his office. But then he called the auditor from the parking lot to say he had lost feeling in his lower leg. He made it back to his shop alright, but soon felt even worse and headed for the hospital. Berroyer wound up spending seven days in the emergency room and 10 days in rehab. Five years after the accident, he spends most of his time in a wheelchair and can't walk more than a few feet without canes. His injuries have interfered with all aspects of his life, including his work, his boating, his golf game, and even his no-longer-twice-weekly "special time" with Mrs. Berroyer.

(You already know where we're headed, don't you?) Naturally, Bennoyer sued. For $10 million.

There wasn't much argument over liability. The real contest focused on the extent of the injury. (Translation — was he just faking it?) Hospital records reported his diagnosis as "acute paraplegia, psychogenic in origin." Another doctor noted "Neuro exam and MRI findings not consistent with subjective complaints . . . . Affect is somewhat inappropriately bright." At trial, the government's medical expert conceded Berroyer had probably bruised his spinal cord, but that mild injury should long since have passed. Asked directly if Berroyer was faking or malingering, he replied "I don't use the terms faking or malingering. I use the term non-physiological." (And really, doesn't "non-physiological" sound so much better than "faking"?)

Judge Arthur Spatt ultimately ruled that the IRS's negligence had caused a "mild spinal cord injury." He awarded Berroyer $112,000 in medical expenses, plus $350,000 for past pain and suffering, plus another$250,000 for future pain and suffering. Oh, and he threw in another $150,000 for Mrs. Berroyer's "loss of services." And the best part . . .? Internal Revenue Code Section 104 says that compensation for injuries and sickness are nontaxable. That means the Berroyers get to keep all $862,000!

So, what do you think? An easy way to earn nearly a million bucks? Or would you rather skip the physical therapy and take advantage of easier strategies, like choosing the right entity for your business, the right plan for your retirement, and the right benefits for your family? We're sorry to confess we can't help you with a loose phone cord. But we can help you with the plan you need to pay the least tax allowed by law. So call us if you want to save tax — but don't want to wheel yourself into a courtroom to do it!

April 2, 2014

A Little Bit of Tax

by Kenneth Hoffman in Tax Counsel, Tax Planning

It seems like every day brings new questions about the digital currency called bitcoin, which first appeared in 2009. Who is the shadowy "Satoshi Nakamoto" who created the currency's protocol and software? Who stole $450 million worth of bitcoin from the Tokyo-based Mt. Gox exchange? Who was the mystery buyer who used bitcoin to snag a $500,000 house on the Indonesian island of Bali?

Last week, the IRS solved a mystery by ruling on how bitcoin would be taxed, at least here in the United States. And their answer to that question may shoot a hole in bitcoin's hope to become more widely accepted. Notice 2014-21 holds that virtual currencies like bitcoin will be treated as property — not currency — for U.S. tax purposes. That means, among other things, that if you take payment in bitcoin at your business, those payments will be taxable (at the fair market value of the currency at the time you earn it), subject to the same rules as if you had accepted cash. If you earn wages in bitcoin, they'll also be taxable, must be reported on a Form W-2, and will be subject to income and payroll tax withholding as if you had earned those wages in cash.

But those rules come as no surprise. The real headache comes when you use bitcoin to buy or sell something. Let's say you acquire two bitcoins for $500 each. A week later, they're worth $520, and you use them to pay an independent contractor across the country or even in the Philippines. You'll have to report that $40 gain on your taxes. "That's not such a big deal," you might think. "My bitcoin is worth more; I'm ok with paying tax on my gain." But now imagine having to report gains or losses on everybitcoin transaction you make!

If bitcoin is going to succeed as an actual currency, it has to pass three strict tests. (Getting an "A" for effort won't work here.) First, it has to be a medium of exchange, meaning it has to be widely accepted as payment for goods and services. (Everyone takes U.S. dollars, but most people have never used bitcoin — at least, not yet. Although, Virgin Atlantic has announced that you can use bitcoin for their $250,000 flights into space.) Second, it has to be a store of value, meaning users feel safe holding it without worrying that its value will fall. (You can take payment in cash knowing that it will be worth the same amount tomorrow.) And third, it has to serve as a unit of account, meaning it has a standard value and every bitcoin is the same as every other bitcoin. (If you have a wallet full of $20 bills, it doesn't matter which one you use to pay for your morning latte.)

The IRS's ruling that bitcoin is property means bitcoin fails that last test. Let's say you have three bitcoins: one that you acquired when it was trading at $280, one that you acquired at $480, and one that you acquired at $880. It makes a real difference which one you spend! It's no wonder the New York Times headlined one story on the IRS notice: "Taxes Won't Kill Bitcoin, But Tax Reporting Might."

There's a "bit" of good news in the ruling. If you hold bitcoins for investment, you benefit from lower rates on long-term capital gains. But that's going to be scant comfort for most users who really want to see bitcoin succeed as a true currency.

We've got a long time to go before most clients have to worry about bitcoin in anything but the most theoretical sense. But keeping an eye out on the future is what separates us from the vast majority of tax professionals who just settle for recording history. Your job is to go out and make money, in dollars, bitcoin, or whatever else works best for you. Let us worry about helping you keep it!