Tax Lessons from U2

I was listening to an old U2 song while working and think that it is fitting for this time of year. It goes something like this. “October and the trees are stripped bare of all they wear. What do I care?” (U2, October, 1981)

I really think that this song is about taxes and believe me, U2 cares!!! In 2006 the Irish government decided to limit tax free earnings on artistic royalties to €250,000 ($338K US). This would have caused a huge tax bill for the band so they decided to move some of their business to the Netherlands which is considered to be one of the most tax favorable countries in the world.

According to Billboard, U2’s 2009-2011 tour grossed around $736 million. It is estimated that the total net worth of the band is over $800 million. So, you can imagine their tax savings by leaving Ireland and its 12.5% tax on royalties for the Dutch tax rate of 5%.

U2 has received a lot of bad press for this move since critics believe that it is totally hypocritical to their human rights activism. I’ll let the philosophers debate the ethical issues. I can say that what they did is perfectly legal and the band still pays close to half of their income in various taxes.

It is October…Do you care? What’s the moral of this story? Good tax planning saves money! It doesn’t need to be complicated and you won’t have to go to Holland. Sometimes simply taking a look at your situation before the year is over can save you money.

Now is a great time to plan for the end of the year. If you would like to discuss your tax planning please call me.

Getting a Hug

This has never happened to me before but last week I met with two different clients that I had not seen in a few months.  I held my hand out to shake theirs and both clients gave me a hug.  Those who know me well also know that I am not a publicly affectionate person.  But I must say that both of these hugs made me feel very nice.  It was almost as though they were acknowledging the service that I provide.  I really enjoy working with my small business clients and consider building relationships as important as the work itself.  It is very rewarding when I can see the passion that my clients have for their business and know that my services are helping them to succeed. 

Bad news for firms that reimburse workers tax free for health insurance

Employers could owe a $100 per day penalty according to the IRS. 

The IRS just issued guidance on the tax treatment of employers who give tax-free money to their employees to help pay for insurance purchased through health insurance exchanges like the Mass. Health Connector.  These employers will be in violation of the Affordable Care Act (ACA) and subject to tax penalties that could be as much as $100 a day or $36,500 a year, per employee. This ruling effectively prevents employers from shifting costs to the government by “dumping” employees into the new health exchanges rather than providing workers with health coverage, as mandated by the ACA.

This new ruling eliminates many arrangements that employers have made in the past with workers to reimburse them for health insurance premiums and out-of-pocket costs. According to the IRS, when an employer reimburses employees for premiums, the arrangement, known as an employer payment plan, is subjected to taxes.

Right now, the IRS has not indicated how strict it will be in levying the penalty.  If the premium reimbursement is done on an after-tax basis, that arrangement generally is not subject to the excise tax. 

The federal government has already postponed until 2015 enforcement of the employer mandate, which requires employers with 50 or more full-time employees to provide insurance for full-time employees until 2015. Failure to comply carries a penalty of up to $3,000 per employee. The $100-a-day tax is separate from that fee, and will be assessed on employers who fail to provide plans that meet ACA standards.

How to open new doors by closing your office

I am not looking to shed a rent payment.  I am hoping to never have one.

How to open new doors by closing your office

Reasonable Compensation

I know...you've heard this from me before. But it is such an important issue that I am going to keep reminding you.

The IRS repeatedly warns that S corp. owners must pay themselves “reasonable compensation”. Despite warnings, S corporation owners often neglect to put themselves on payroll…that is a regular payroll checks with tax payments for withholdings, filing W-2s, etc. Instead, many owners take out cash as a draw or distribution.

The IRS is on to this, is looking for it and you could be at-risk for an audit. The IRS will attempt to re-characterize all those draws as wages and subject them to all applicable payroll taxes. This re-characterization triggers back taxes, penalties and interest and have bankrupted other small businesses and owners.

So, you should pay yourself “reasonable compensation”. If you are unclear what that means, please call me. Together we can go through the steps needed to prevent an unwanted and painful IRS audit.

Bank loans to small business

Banks are often the accompanist to this common S corporation blunder: Banks often will loan money directly to your S corporation to buy equipment, building, etc. As odd as it sounds, have the bank loan you the money to you personally and then you loan the money to the S corp.  In order to take any losses of the S corporation, you must have at least that much basis (see e-mail sent last week) in your S corporation. But you only get basis from money you’ve personally invested in or personally loaned to the corporation. Bank loans made directly to the S corporation do not count. This S corporation tax mistake gets made all the time. S corporation owners have loans made to the S corporation but then can’t take any deductions because there is no basis! To add insult to injury, the S corporation loan may be personally guaranteed or dual titled (loan made to both S corporation and person) and still no deduction. If you have any questions about borrowing money from or lending money to your small business, please give me a call.

Basis and Distributions

I am often asked "What is basis"? Think of basis like a checking account. Investing in your business increase basis just like a bank deposit. A draw from your business decreases basis just like a bank withdrawal. Profits add to basis and losses decrease basis (similar to how interest earnings increase a bank balance and bank fees subtract from it). Just like a bank account, more basis cannot go out than comes in—basis can never go below zero.

So, if you are thinking about taking a distribution from your S-Corp. (or LLC taxed as an S-Corp.), please call me. We should calculate your basis first to make sure that a distribution will not create any unwanted tax problems. Remember…zero basis equals no tax free distribution!