Thursday, March 28, 2013

Tax Break for Low-Income Artists and Musicians

The front page of Form 1040 contains a deduction line for "certain business expenses of performance artists."  Many actors and musicians get excited about this tax break until they read the fine print on page 4 of the instructions to Form 2106 (which they do not have to file for this tax break).

The special deduction is only useful for performance artists who receive a W-2 as an employee.
Freelancers and independent contractors (who receive Form 1099s) are always entitled to deduct all business expenses on Schedule C, so they do not need to use this special deduction.

Internal Revenue Code section 62(b) provides that a performance artist-employee may take the special deduction only if:
1) He or she worked as an employee for at least two employers (who each paid the artist $200 or more during the year),
2) The expenses being deducted are more than 10% of the income from performance art, and
3) His or her total adjusted gross income is less than $16,000.

The $16,000 income threshold includes income from all sources, not just the performance art.  If the artist is married, the couple's combined income must be less than $16,000. 

Even if a starving artist qualifies for the deduction, it does not provide a particularly large benefit since people do not pay a lot of federal income taxes when they make less than $16,000 a year, thanks to the standard deduction, the earned income tax credit, the credit for small business low sulfur diesel refining, and other tax benefits.

The $16,000 threshold was fixed when the deduction was added in 1986, when the median household income was around $23,000 and when the median artist income was a little lower, and it has never been adjusted for inflation.

Tuesday, March 26, 2013

Tax Break for Employee Discounts

When an employer gives something for free to its employee, like an apartment or a car, that item is treated as taxable compensation to the employee.  But what about employee discounts?

Internal Revenue Code section 132(c) provides that employee discounts is not taxable compensation, up to a limit:
1. the employer can sell goods at cost to its employees, and
2. the employer can provide services to its employees at up to 20% discount from the regular prices.

The employer must be selling the goods or services to general customers.  For example, a Ford dealership can sell a Ford car at cost to any of its employees without generating taxable income, while a Macy's that sells a car at an employee discount would result in taxable income to the employee-buyer.

Anything above the limit is taxable income to the employee.  The fact that goods can be sold at cost is of great relief to anyone who works in a clothing retailer, where the store markup is usually more than 20%. 

The tax-free benefit does not apply to discounts offered to employees of another company  Thanks to vigorous lobbying from department stores, a special rule provides that a department store can lease counter space to other companies (like cosmetics firms), and those separate companies' employees can receive the department stores' "employee" discounts (and vice versa).

When the fringe benefit rules were added in 1984, the employee discount can be provided to an employee or a retired employee, or their spouses, dependent children, and certain widows.  A very special rule was quickly added in 1986 to provide that parents can also receive employee discounts, but only for an employee in the airline industry. 

Tax-free employee discounts are not limited to retail workers, though they do not apply to real property or investment property.  A company like Boeing could sell its $150 million airplanes to its assembly line workers at cost, if it were so inclined, but more commonly appliance manufacturers sometimes arrange for their employees to get discounts on their products. 

Wednesday, March 20, 2013

Tax Loophole for the Non-Profit Organization that is the National Football League (NFL)

In 2010, the National Football League (NFL) earned $184,299,577 in revenues, on which it paid no income taxes.   Its highest paid employee is Steve Bornstein (Executive Vice President of Media), who earned $12.2 million that year from the NFL and related organizations.  NFL Commissioner Roger Goodell was paid $11.5 million.  Former NFL Commissioner Paul Tagliabue received $1 million in salary and $7.6 million in other compensation, which is not bad for someone who left the job in 2006.

The public has knowledge of the above because the National Football League files a Form 990 (Return of Organization Exempt from Income Tax) every year, just like Harvard University, the New York Public Library, and other tax-exempt organizations.

Internal Revenue Code section 501(c)(6) provides that tax-exempt organizations include "Business leagues, chambers of commerce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual."

It should be noted that amateur football leagues are not covered by the tax-exemption, nor do associations for other sports, but they may qualify for the general tax exemption for charitable and educational organizations under section 501(c)(3).

An individual cannot claim a payment to the NFL as a tax-deductible charitable contribution, which are governed by different rules in section 170, but most payments by the teams to the NFL are deductible as business expenses. 

The NFL obtained tax-exempt status from the IRS in 1942 (the original IRS filing has been lost), but section 501(c)(6) was modified to specifically include all professional football leagues in 1966 by Public Law 89-800 ("An act to suspend the investment credit and the allowance of accelerated depreciation in the case of certain real property").  After the House and the Senate both passed a bill concerning the investment credit and accelerated depreciation, the Conference Committee decided to add an extra provision for professional football leagues.  The Conference Committee was concerned that the NFL's pension plan would otherwise be considered as benefiting a private individual. 

The Conference Committee also helpfully amended the antitrust statute to provide that antitrust laws would not apply to the 1966 merger of the NFL and the AFL, though they might apply to future mergers in football and other professional sports. 

Tax-exempt organizations are generally subject to federal income tax for conducting commercial activities.  The Conference Committee tried to add an exception for the NFL's "income derived from promoting or sponsoring any professional football game if such promotion or sponsorship does not occur more than four times during the taxable year with respect to any team," but that proved even too much for the House and it was not included in the final legislation.

Monday, March 18, 2013

Tax Break for Traveling First Class, by Ship

Christopher Columbus on speed boat.
People traveling by air for business reasons can deduct the costs of their plane tickets, even if (and especially if) the tickets are for first class travel.  When the employer is paying for the tickets, the employer can deduct the costs, and the employee receives a tax-free ticket.  But what about even more luxurious business travel, by cruise ships and oceanliners?

Ocean travel for business purposes is deductible, but Internal Revenue Code section 274(m) imposes an upper limit on the deductible amount, of around $734 per day for fall and winter travel and $624 per day for spring and summer travel.  The maximum allowed deduction is technically defined as twice the daily per diem amount allowed for federal executive branch employees.

For example, let's say that a lawyer traveled by ocean liner from New York to London on business in October of 2012.  The trip took six days.  Her maximum deduction for the travel costs is $4,404 for the business expense (6 x $734). 

This deduction for "luxury water transportation" is solely for traveling from one location to another by ship for business purposes.  If the business purpose for the travel is on the boat itself, like a convention, other limitations apply.

Wednesday, March 13, 2013

Tax Break for Mom and Pop Diesel Refineries

Everybody loves small business, and everybody loves diesel fuel with sulfur content of less than 15 parts per million.  Internal Revenue Code section 45H provides an income tax credit of 5 cents for every gallon of low sulfur diesel fuel produced by a "small business refiner."

But no credit is allowed for low sulfur diesel produced by the bigger refineries (i.e., most refineries).

A small business refiner is defined as a refiner of crude oil with 1,500 employees or less and that did not produce more than 205,000 barrels of diesel for the specific one year period from January 1, 2002 to December 31, 2002.  Thus, a rapidly growing refiner would qualify as a small business refiner as long as it did not refine too much fuel back in 2002.

The total credit is limited to 25 percent of the capital costs incurred between 2003 and 2009 to come into compliance with EPA requirements for low sulfur diesel fuel. 

Monday, March 11, 2013

Tax Exemption for Foreign Gamblers Playing Five Specific Games

To follow up on last week's dogracing tax break for foreigners, a nonresident alien (foreigner) is taxed on all of his or her income from US sources, including gambling winnings in the United States.  However, a foreign gambler pays no US tax on winnings from blackjack, baccarat, craps, roulette, or big-6 wheel in the United States.

The five-specific-games gambling exception was added to the Internal Revenue Code by the Technical and Miscellaneous Revenue Act of 1988.  Congress discovered that it was difficult to collect taxes on so-called "table games" when casinos did not want to check the passport of every gambler who walked in the door.  It did not help that the American casinos were competing against tax-free gambling in Monaco and other countries.

However, the casinos have somehow managed to generally comply with Currency Transaction Report filings and tax withholding for American gamblers.  The foreign gamblers exception does not apply in any case where the Secretary of the Treasury determines by regulation that tax can be collected in an administratively feasible fashion, but no such regulation has ever been issued.

A foreign winner of other types of games will pay 30% of the gross winnings in US taxes.  In the landmark case of Barbra v. United States2 Cl Ct 674 (1983), a Mexican traveler who won $61,580 on two Las Vegas keno tickets had to pay 30% of the winnings in taxes, even though he lost over $475,000 on other gambling in the same year.  He could not deduct his gambling losses against his gambling winnings. 

Update: on July 9, 2013, in the landmark case of Park v. Commissioner [pdf], the District of Columbia Court of appeals concluded that the 30% tax on foreign gamblers of other games applies on a per-session basis, not on a per-bet basis.  For example, if Mr. Barbra won $61,000 on one poker bet and lost $475,000 on another poker bet in the same session (presumably the same day), the 30% US tax is imposed on his session's net winnings, which is zero.  But if he won $61,000 in one session and lost $475,000 in another session, he would have to pay the 30% withholding tax on the $61,000 of winnings. 

Thursday, March 7, 2013

Tax Break for Foreigners Betting on American Dogracing and Horseracing

Gambling earnings from lotteries and sports betting are taxed as ordinary income.  Foreigners are taxed at a rate of 30% on their gross gambling winnings from US sources, with some exceptions.

Internal Revenue Code section 872(b)(5) provides a nice exception for foreigners, who are not taxed on their winnings from "a parimutuel pool with respect to a live horse race or dog race in the United States," if the wager is legal and initiated outside the United States. 

A parimutuel pool is the form of race betting where all the money are placed in a pot, the house or track takes its cut, and the remaining cash is divided among the winners.

This rule was added by the American Jobs Creation Act of 2004.  Before 2004, the taxation of foreigners on their parimutuel winnings depended on what kind of pool they were betting in, with some pools subject to US tax and some pools not subject to tax.  Congress made things easier for everyone by exempting all pools from US tax, as long as they involved American horse racing or dog racing (and a foreigner betting on them).

Monday, March 4, 2013

Tax Break for Biking to Work

The federal government provides various tax breaks for commuting by bus, subway, and other forms of mass transportation.  But the Brooklyn delegation to Congress has not been idle, and Internal Revenue Code section 132(f) provides a lucrative tax break for the expenses of biking to work.

A bicycle commuter can receive tax-free reimbursements from his or her employer for the costs of bike purchase, maintenance, and storage, up to the incredible sum of $20 per month ($240 a year). 

The $20 per month limit is not indexed for inflation.

The bicycle commuting tax benefit was enacted as part of the $700 billion stimulus bill of late 2008. 
At the highest federal marginal tax rate of 39.6%, for incomes over $400,000, the tax savings per biker should equal around $95 a year.

In order for the bicycle commuting tax benefit to not explode in popularity and cost, for the 0.53% of Americans who commute by bike, the $20 per month reimbursement is only allowed only for months during which the bicyclist "regularly" uses the bike for a "substantial portion" of the commute to work, and during which he or she does not receive any TransitCheks or other tax-free transportation benefit.