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Tag:

IRS

Taxes

I am Not Sure How I Feel About the Recent Tax Inversion Activity

by Evan June 26, 2014

If you follow business news at all you’d see an increase in tax inversion stories.  To put it simply tax inversion is when a United States company buys a foreign company and adopts the purchased company’s address to reduce taxes owed to Washington.  A screenshot from google’s search insights shows the increase interest in the topic:

tax inversionWhat is Tax Inversion?

Unsurprisingly, Forbes provides a more thorough definition tax inversion,

The basic idea of a tax inversion is really rather simple. If the US corporate taxation system is becoming a burden on a company then obviously, the thing to do is to move the domicile of the company so that it’s no longer subject, for its outside the US operations at least, to that US corporate taxation system. Unfortunately this is becoming harder. If you try to just move the company out of the US then the IRS is going to frown very hard at that. To the point that you have to (almost, but not quite) dissolve the company, pay any tax that might be due in the future and then reconstitute the company again. Given that any company of any age is going to have substantial unrealised gains hidden in it this is really a very unattractive option.

The better way to do it is an “inversion”. Go and buy some foreign company but structure the deal so that it’s either the foreign company taking over the American, or some new holding company somewhere which then owns both of the two “merging” companies. If more than 20% of the entire operation ends up being owned by those foreigners then this can mean that the original US company moves out from being US domiciled and thus frees itself from the US corporate tax code. And this without triggering massive demands from the IRS as everyone waves bye bye.

Statistics Regarding Tax Inversion by United States Companies

The recent increase in media attention regarding inversion has to do with a few huge deals:

  • American based Pfizer buying UK Based, AtstraZenica (which, at the time of publishing seems to be dead)
  • Medtronics buying Irish Covidein
  • Walgreens buying the rest (they already own 45%) of a Swiss company named Alliance Boots

According to Bloomberg,

About 41 U.S. companies have reincorporated in low-tax countries since 1982, including 11 since 2012.

That first blimp for the keyword, Tax Inversion, in the google trends graph above happened in 2012.

Why A Company Would Partake in a Tax Inversion Takeover?

Money…or put more eloquently from the same Bloomberg article,

It’s easy to see why multinational companies like to flee the U.S. tax system. The U.S. corporate income tax rate, 35 percent, is the highest in the developed world. The U.S. is also one of the few countries that makes its companies pay that rate on all the worldwide income it brings home — even if the profit was generated by a subsidiary in a foreign country with low taxes, such as Ireland. Many nations, including the U.K. and Canada, tax only domestic profits. One perverse result is that an independent U.S. company can end up paying more taxes than an identical U.S. company owned by a foreign parent. By creating or buying a foreign parent, a company escapes U.S. tax on worldwide income. Drug and technology companies find this particularly enticing because their profits stem from intellectual property such as patents. Transfer those patents to a subsidiary in a zero-tax jurisdiction like Bermuda, and voila! The bulk of profits, which would otherwise face the 35 percent income tax rate, aren’t taxed anywhere.

Why I am Pro-Companies Taking Advantage of the Tax Inversion Loophole

Whether your name is Evan or Warren Buffet no one has a patriotic duty to pay more taxes than what they are legally bound to by the laws of the United States.  I believe that this sentiment extends to corporations (even ones I don’t like such as Apple).These companies are following the rules as they have been given to them.  Want them to behave a different way? Change the rules!

Maybe that means change the tax rate? Maybe that means change how we treat worldwide income? Maybe that means change our patent protection system? Maybe that means you don’t get use of our publicly traded markets? Maybe companies that do this have to repatriate all income worldwide prior to the merger?

Notwithstanding, even as I write this post I am not sure if I really believe the libertarian-global economy argument.  I am an American, and something just bothers me about a company ditching the home that provided the stable environment to grow in just to save on taxes.  Hell, it is the taxes they are trying to avoid that keeps our infrastructure up to transport widgets throughout the world, our patent system that while not perfect protects the ideas that make the widgets and our police going to protect from the widgets getting stolen.

 

Do you have an opinion on Tax Inversion?

June 26, 2014 6 comments
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Taxes

Preparing for my Annual CPA Tax Meeting

by Evan February 24, 2014

Every year I take the opportunity of owning a personal finance blog to organize my thoughts and paperwork for my upcoming CPA meeting.  Could I do this in a word document? Sure, but why own a personal finance blog if I can’t ask others if they thought I missed anything.

While my family’s income isn’t much higher than the average family’s income our situation is absolutely more complicated.  My CPA often jokes that I am one of his best prepared clients.  I have thought about sending him this post but it isn’t worth explaining what a personal finance blog is!

I know it may be hard to offer an idea, but if you think I missed anything or have any thoughts please let me know!  

My Family’s Income

  • My W2
  • My Wife’s 1099 – The wife is self employed and unincorporated
  • My Wife’s corporate income records which owns this blog and a few other sites
  • My small law practice income information
  • My K-1 from my investment club

My Family’s Banking Information

  • 1099s for my Savings Accounts
  • 1099 for my Wife’s saving account
  • 1099 for Joint Saving Accounts
  • Escrow interest info from our mortgagee

My Family’s Investing Information

  • 4 Fidelity Non-Qualified Account information (Reason I listed 4 was to see where we end up after next year)
  • My Wife’s non-qualified investment account held at my employer
  • My Traditional IRA information
  • My Wife’s Roth IRA information
  • My 401(k) should be included with my W2

My Family’s Deductions

  • We bought our current home in January of 2013 so I have the information so that the CPA can determine what is and what is not deductible pursuant to Publication 530.
  • Mortgage interest! and plenty of it
  • Law school loan interest
  • Charitable deductions
  • A laundry list of things that may be deductible since part of our home is used as an office (interestingly enough a quick google search indicates that the IRS has provided yet another way to calculate the deductibility of home office expenses – again, going to let the CPA handle this):
    • Electricity / Heating Costs / Gas Costs
    • Internet & Phone
  • Other Business expenses:
    • Automobile costs
    • Certain additional Insurances

See anything I may be missing?

February 24, 2014 1 comment
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Qualified/Retirement

Do Not Liquidate Your 401(k) When Leaving Your Job

by Evan February 14, 2014

For better or worse the 401(k) seems to be the main savings vehicle for Americans, so it always shocks me how little most people actually know about it.  Financial Advisor Magazine (along with every other main stream media outlet) jumped on a recent report by Fidelity (oddly enough none of these main stream outlets seem to be linking to the report), which highlights a significant problem.

  • 35 percent of all participants in plans it administers cashed out their 401(k) balances when leaving their jobs last year…
  • Four out of 10 workers (41 percent) age 20 to 39 cashed out, and 51 percent of workers who left jobs grossing under $30,000 cashed out

I have to believe that most of these distributions had less to do with need of the cash versus not understanding their options.  This pure gut sentiment has to do with the thought that if cash was that tight they wouldn’t be contributing/participating in these plans.  This is not to say an “extra” $X coming out of a retirement plan they didn’t remember wouldn’t help any family but at what cost?

HelloWallet, a firm that provides software-based financial guidance tools for employers and employees, analyzed Federal Reserve data and found that $60 billion was cashed out from workplace plans in 2010, up from $36 billion in 2004.

In recent years I have moved away from posts about simple information that can be found anywhere but with statistics like the one above maybe someone seeing this post may avoid a terrible mistake.

How Does one Transfer their Employer Sponsored 401(k) to an IRA?

Known in the financial world as a rollover the transaction is relatively easy although obviously not utilized enough.  For most tax issues I like to go to the source (IRS) which has an easy to understand guide titled, Tax Topic 413,

A rollover occurs when you withdraw cash or other assets from one eligible retirement plan and contribute all or part of it, within 60 days, to another eligible retirement plan. This rollover transaction is not taxable but it is reportable on your federal tax return. You can roll over most distributions from an eligible retirement plan except for:

  1. The nontaxable part of a distribution, such as your after-tax contributions to a retirement plan (in certain situations after-tax contributions can be rolled over),
  2. A distribution that is one of a series of payments made for your life (or life expectancy), or the joint lives (or joint life expectancies) of you and your beneficiary, or made for a specified period of 10 years or more,
  3. A required minimum distribution,
  4. A hardship distribution,
  5. Dividends paid on employer securities, or
  6. The cost of life insurance coverage.

Further exclusions exist for certain loans and corrective distributions.

The taxable amount of a distribution that is not rolled over must be included in income in the year of the distribution.  If an eligible rollover distribution is paid to you, you have 60 days from the date you receive it to roll it over to another eligible retirement plan. Any taxable eligible rollover distribution paid from an employer-sponsored retirement plan to you is subject to a mandatory income tax withholding of 20%, even if you intend to roll it over later. If you do roll it over, and want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. You can choose to have the payer transfer a distribution directly to another eligible retirement plan or to an IRA. Under this direct rollover option, the 20% mandatory withholding does not apply.

In general, if you are under age 59½ at the time of the distribution, any taxable portion not rolled over may be subject to a 10% additional tax on early distributions unless an exception applies.

Wait a minute lets read that last part which I emphasized!  Re-read it?  Yup, if you are under 59 and 1/2 years old (no freaking clue where they got the half) then to access your own money you are TAXED and then hit with a 10% additional penalty.  Lets take a look at an example:

  • You are 35 and work for a company for 5 years and amass $40,000 in your 401(k).
  • You get fired or decide to leave and you get a call from HR and they say you can roll it over somewhere OR I can have the plan admin send you a check.
  • You think to yourself I’ll just take a check I needed my bathroom redone.
  • Your $40,000 is then taxable income so if you are in the 20% bracket that is $8,000 off the top.
  • You are then penalized another $4,000 ($40K * 10% Penalty).
  • Ignoring opportunity and compounding your $40,000 is really worth $28,000.

Ouch.

So  nearly 800 words later we get back to the title of this blog post – DO NOT LIQUIDATE YOUR 401(k)! If you are leaving your job find out about a rollover.

February 14, 2014 4 comments
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Taxes

Why is Everyone Attacking Apple For Overseas Profits Not Being Taxed

by Evan May 21, 2013

I can’t figure out why the media and the masses are angry with Apple for legally not paying additional taxes.  I am not an Apple guy (for a few reasons), but I think planning for income taxes is a fantastic move on their part.  You have no patriotic duty to pay more taxes than what is legally mandated so why would Apple?

One of my favorite quotes from law school on the subject is from Judge Learned Hand (yup, real name) in Helvering v. Gregory (1934),

Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes. Over and over again the Courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike and all do right, for nobody owes and public duty to pay more than the law demands.

Why doesn’t that quote apply to Apple? Is it because it is a corporation? I don’t buy that – corporations whether they are United States based or Foriegn are still made up of people (not sure where I fall on Citizens United).  Is it because of the sum? That is just bullshit class warfare. Is it because it is just icky? I assume that is what most idiots who watch MSNBC believe.

If Apple was doing anything legally wrong there would be a different headline, one that read “Apple sued by Federal Government” or if you were lucky enough to have the New York Post in your area it would read “Tim Cook(ed) Apple.”

So, like the great Ice-T once said (but didn’t originate),

Don’t hate the player, hate the game

Want someone to blame? Blame your elected officials, and don’t give me the bullshit de facto – lynch the conservative republicans.  If I remember correctly it wasn’t too long ago when the Democrats controlled both Houses in Congress and the Executive Branch.

Who else can quote both Ice-T and one of the greatest legal minds in our history?

May 21, 2013 11 comments
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Taxes

Mo Money Means Mo (IRS) Problems

by Evan May 13, 2013

I have always assumed that with an increase in income, especially business based income, increases your risk to an audit from the Internal Revenue Service.  My thought process is that it just makes good business sense.  Even if they found a W2 employee making $50,000 cheating on their taxes it doesn’t really matter because it would cost more in man hours to collect the money he owes (even with penalties).

I was excited to see a recent Wall Street Journal article titled, “Chances of an Audit Grow With Income” which actually backed up my assumptions,

At first glance, the answer appears simple: very low. The IRS has audited only about 1% of all individual income-tax returns in each of the past several years.

***

Last year, the IRS audited nearly 4% of those making between $500,000 and $1 million. It audited nearly 9% of those making $1 million to $5 million. For those making $5 million to $10 million, the audit rate was 18%. For those who made $10 million or more, the audit rate was more than 27%.

The article also says,

IRS officials are keenly interested in taxpayers who own their own businesses, file what is known as “Schedule D,” and deal in large amounts of cash.

The cash and owning your own business makes sense but what about a Schedule D? According to the IRS you use a Schedule D when,The sale or exchange of a capital asset not reported on another form or schedule.

  • Gains from involuntary conversions (other than from casualty or theft) of capital assets not held for business or profit.
  • Capital gain distributions not reported directly on Form 1040 (or effectively connected capital gain distributions not reported directly on Form 1040NR).
  • Nonbusiness bad debts.

Bullet points 1 and 3 make sense, which I guess brings bullet point 2 in by default.

May 13, 2013 1 comment
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