In 2016, SyFy debuted a new show called Incorporated about a dystopian future where corporations, not governments, rule the world. If that nightmare ever comes true, we all know which real-world corporation will rule them all. It's Apple, of course, which just took the shrink-wrap off their $5 billion ring-shaped headquarters in Cupertino, CA and is on the verge of becoming the world's first trillion-dollar company.
Odds are good that you've got an iDevice of some sort in your home, office, or pocket. Apple's product design geniuses use crack-like design and technology that keeps users hooked like heroin addicts, to make Apple the most valuable corporation in the world. But what you may not know is how Apple's financial geniuses use proactive tax planning to make their company even more valuable. And now, the Tax Cuts and Jobs Act has inspired them to act again.
Apple has scattered their manufacturing operations throughout the world to take advantage of lower costs overseas. (You think your 10-year-old's science fair project is special? Big deal — 10-year-olds in China are making iPhones!) This has prompted various entertaining debates over the ethics and politics of offshoring, which we won't presume to touch here.
Apple hasn't just off-shored manufacturing operations to cut manufacturing costs. They've also off-shored their profits, to take advantage of tax rates that are lower than our own traditional 35%. This involves strategies with names like the "Double Irish with a Dutch Sandwich" strategy, which sounds like something you'd see figure skaters attempting at the upcoming Winter Olympics. Apple's Irish subsidiary, Apple Operations International, earned $30 billion from 2009-2012, and didn't even file tax returns for those years.
Hoarding cash before the IRS gets to grab 35% of it doesn't mean stuffing it under some sort of supersized Irish mattress. The parent company borrows their own subsidiary's cash, deducts 35% of the interest they pay for it here in the U.S., and pays tax on that interest at just 12.5% in Ireland, shifting even more money out of IRS reach.
Now the Tax Cuts and Jobs Act has cut the rate on Apple's iProfits to just 21%. It even includes a bonus "get out out of jail free" card for companies with cash overseas, letting them pay a one-time 15.5% rate to load those bales of cash on a plane and bring them home. So Apple is repatriating $252 billion, and writing the IRS a $38 billion check — enough to finance the entire government of Wisconsin for a year, with enough left over to pay for Jacksonville or St. Louis, too. But that's still $43 billion less than paying the 35% on the full amount.
And what will Apple do with their iSavings? Throw a party, of course! They've announced plans to hire 20,000 new employees, build another major domestic campus, and boost R&D to diversify away from the iPhone. They'll also use billions more for dividends (which put cash in shareholders' hands) and share buybacks (which also rewards them by pushing prices up).
We realize you don't have $252 billion to plan for. But that doesn't mean you can't profit from planning, too. So give us a call when you're ready to take full advantage of the new tax law and see how much iCash we can put in your pocket!
In 2012, the singer Whitney Houston died suddenly, drowning in a hotel bathroom after years of battling drug addiction. Yet the world will always treasure her musical legacy. The Guinness Book of World Records reports that she was the most awarded female artist of all time, with two Emmys, six Grammys, 30 Billboard Music Awards, and 22 American Music Awards, among 400+ awards. Rolling Stone listed her debut album as one of the 500 greatest albums of all time. And VH1 put her number three on their "greatest women of the video age" list, behind Madonna and Janet Jackson.
Houston also left a considerable financial legacy, estimated at $20 million. She saved all her estate in trust for her only child, Bobbi Kristina Brown, with instructions to release 10% when Brown reached age 21, another sixth at age 25, and the remainder at age 30. (Brown died in 2015 from her own drug overdose, leaving the ultimate fate of the estate in the hands of lawyers, who are sure to bill lots of hours.)
But Houston's estate includes far more than cash and securities. It also includes her music catalog, digital performance royalties, movie and television residuals, and "publicity rights," meaning her right to control the commercial use of her name, image, and likeness. Now, it's easy to value assets like cash or stocks. But valuing the music catalog involves estimating the amount of future royalties, and valuing publicity rights is even more subjective.
Naturally, the IRS gets so emotional about those sorts of intangible legacies, especially with estate tax rates in 2012 running at 40% on amounts over $5,120,000. In fact, estate tax returns are audited more than any other type, with the IRS examining over 30% of estates reporting $10 million or more in assets. (Does that mean estate taxes are the tax man's "Greatest Love of All"?) These disputes often come down to a battle of valuations, which makes a good appraiser all the man you need.
The IRS determined that Houston's representatives underestimated the value of her intangible assets by $22.6 million. They imposed a $7.92 million deficiency and $3.17 million in penalties. The parties were scheduled to go to trial next month. However, on December 26, 2017, the estate filed documents agreeing to settle for $2,275,366. ("Didn't We Almost Have It All," we can imagine the folks at the IRS humming as they deposit the estate's check.)
This isn't the first time the IRS has battled over pop star publicity rights. Executors for Michael Jackson's estate valued his at just $2,105, which essentially argues that the King of Pop's bizarre controversies and misadventures had rendered his image essentially worthless. Attorneys at the IRS told them to beat it, valuing those rights at $434 million. That case is still working its way through court — last month, a Tax Court judge denied the IRS's bid to provide additional evidence to support seeking penalties up to 40% of the allegedly understated tax.
The Tax Cuts and Jobs Act of 2017 doubles the estate tax "unified credit" to $11.2 million per person for 2018. This should cut the number of estates filing returns to less than 4,000 per year. But careful planning is still in order to make sure your legacy goes where you want it going. So call us when you're ready to plan, and let's make beautiful (financial) music together!
NFL playoffs have begun, and Wild Card Week featured some real competition. On Saturday, the red-state Tennessee Titans barbecued the red-state Kansas City Chiefs, 22-21, and the red-state Atlanta Falcons defeated the blue-state Los Angeles Rams, 26-13. On Sunday, the purple-state Jacksonville Jaguars pounced on the blue-state Buffalo Bills, 10-7, and the red-state New Orleans Saints marched past the purple-state Carolina Panthers, 31-26.
Now, if you're like most people, you're wondering why we're polluting your NFL news with red state and blue state political references. You wouldn't think politics matter on the gridiron! Unfortunately they do, now even more than before, thanks to the Tax Cuts and Jobs Act of 2017. Huh?
Here's the deal. Blue states, as a group, tend to have higher income and property taxes than red states. (That's not always true — Washington, for example, has no state income tax at all — but it's a fair rule of thumb.) Those higher taxes make blue states slightly less attractive for athletes who play home games subject to income tax there. If you're a first-round draft pick wide receiver, would you rather pay a 13.3% top tax rate to catch passes in Los Angeles, or a 0% state tax rate to catch them in Jacksonville?
Does this really matter? Surprisingly, yes. Erik Hembre, Assistant Professor of Economics at the University of Illinois at Chicago, took win-loss records from the last 40 years of professional sports, then overlaid them with state marginal tax rates. He found that "state income tax rates significantly impact team performance." In the NBA, where the effect is greatest, moving a team from high-tax Minnesota to tax-free Florida should yield 4.7 more wins per year. In baseball, where there's no salary cap and the tax effect is lowest, the same move would still add 1.6 Ws per year.
The new tax law actually magnifies this effect. Under the old rules, a hypothetical utility infielder, grossly overpaid to bat .260 for the Yankees, could at least deduct the 13% he pays in state and local income tax from his federal return. That effectively reduces the tax by about 40%. But the new law caps the deduction for state and local income, sales, and property taxes at just $10,000, no matter how much an athlete actually pays. That means sports fans in high-tax New York will have even more to grouse about!
The new rules will be expensive for lots of blue-state taxpayers, not just athletes. The Government Finance officers Association found that in 2015, over one-third of taxpayers in California, New Jersey, and New York claimed the deduction, with an average amount over $17,000.
Blue state officials aren't taking the change lying down. Legislators in California and New Jersey are considering encouraging taxpayers to make gifts to the states in exchange for credits against their tax. This would let them sidestep the new law by deducting those amounts as charitable contributions. New York Governor Andrew Cuomo has threatened to challenge the constitutionality of the law and switch from income to payroll taxes. Only time will tell if those strategies are practical and pass muster with the IRS.
Until then, there's a time-tested strategy that works better than any legislative Hail Mary. That strategy is planning. If you don't have a tax plan yet, 2018 really is the time to get one. And if you do, now may be the time to update it. So call us for the coaching you need to make the most of this new law!
They say that "what goes up must come down." But that's not true when it comes to college costs. U.S. News reports the average private college tuition stood at $16,233 back in 1997-98 — roughly $24,973 in 2017 dollars. But the same tuition today costs $41,727. And that's before pricing in luxuries like, you know, meals, and a place to sleep. In-state college costs are rising even faster as legislatures cut budgets for higher education. That means colleges are increasingly turning to alternate funding sources, including their endowments.
In academia, though, as in so many other parts of our "winner take all" society, there's the 1%, and there's everyone else. America's richest 800 colleges and universities hold over $500 billion in endowments, which sounds like there should be plenty to help supplement tuition and fees. But the top 1% of schools hold over $10 billion each, and 11% of schools hog 74% of those assets. That leaves the Faber Colleges of the world essentially fighting over scraps. ("Knowledge is good.")
Now, the Phi Beta Kappas who write our tax code have turned their green eyeshades towards those mammoth pools of tax-free wealth. Both the House and Senate tax bills working through Congress would impose a 1.4% excise tax on net investment income of private colleges holding more than $250,000 per student. That group includes about 70 schools, including obvious targets like Harvard, Yale, and Princeton. At the same time, the proposal spares public school systems with big endowments like the Universities of Texas ($25.4 billion), Michigan ($9.7 billion), and California ($7.4 billion).
It's true that if any schools have "too much money" (LOL), it's the top-shelf Ivies. Harvard's endowment started in 1638 with £779 and 400 books. Over the next 379 years, it's grown to over $37 billion (and 16 million books), leading critics to call it a hedge fund with a university attached. In 2015 that fund grew by just 5.8%, compared to rival Yale's 11.5%. But Harvard Management Company paid its chief executive a whopping $14.9 million, with his deputy taking home $11.6 million. (And you thought college football coaches were overpaid!)
Academic endowments have grown so large that they're starting to use some of the same tax strategies as the richest individuals. The New York Times recently exposed how colleges use offshore entities to boost earnings, including "blocker corporations" that let them avoid tax on debt-financed "unrelated business taxable income." (Trust us, those UBTI rules are even more boring and technical than they sound.)
But naturally, academics are irate at the proposal, rolling up their leather-patched tweed sleeves and prepping for a (genteel) fight. "Endowments support substantial student aid and student service programs, and provide funding for instruction, research, and for building and maintaining classrooms, labs, libraries, and other facilities," said the Association of American Universities. At Princeton (the #1 target with $2.5 million per student), undergraduates from families earning under $56,000 pay no tuition, room, or board, while those from families earning under $160,000 pay no tuition.
Here's the good news. You don't have to be an Ivy League university — or even have an Ivy League education — to save big on your tax bill. You just need a proactive plan. So call us when you're ready for some real-world lessons on how to pay less!