Lately, I keep thinking about a scene in an early Paul Newman film.
“The Young Philadelphians” (1959), had romance, betrayal, high society, blind ambition, war, and for good measure, a murder trial.
Of course, I remember none of that. NJ company
In the one and only scene that I do remember ...
A tax attorney (Paul Newman) gets a lucky break. Forced to work over the Christmas holiday, he is available when the very rich Mrs. J. Arthur Allen (Billie Burke) needs her will amended. With his specialized knowledge, he shows her how to avoid paying a great deal of taxes. His suggestion–
shift some business operations from her her NJ company to her PA company. Her regular attorney says she would never rearrange corporate operations just to save on personal taxes. The very rich Mrs. J. Arthur Allen responds, as I remember it, “the hell I wouldn’t.”
"Location, location, location..."
Now, we all agree that taxes are complicated. But the “fun” thing about taxes is, all that complication presents numerous opportunities just waiting to be seized.
If your business operates in more than one jurisdiction (city, state), each has its own “income apportionment formula” that decides how much of your income is taxed by that jurisdiction. Most formulas have looked at three factors, (payroll, sales, and property), but recently many states are moving to a single factor (sales). And since each jurisdiction can use a slightly different formula, some income can be taxed by multiple jurisdictions, and some can taxed by none. That was the basis to Paul Newman’s tax savings brilliance in the movie: relocate an operation, change the tax rate.
But sometimes you don’t have to move an entire factory. When one of the apportionment factors is a relatively small part of your operations, changing that factor can move income from one jurisdiction to another.
Another example involved a large construction contractor doing business mostly in New York City. In this case, the property factor had a very small denominator. I showed this client how it could rent an equipment storage yard just outside city limits, reducing city corporate taxes far more than the added rent expense.
Choices, choices, choices...
And it’s not just the complexities of apportionment that present opportunities.
Depreciation involves numerous choices of categories, methods, asset lives, and early writeoffs. The federal choices can be different from the state choices. Do you know what’s better, $20,000 deducted as bonus depreciation, or $20,000 deducted under Section 179? It can make a big difference.
Buy or lease? Corporation or LLC? C-corp or S-corp? Boxers or briefs? The “what’s better?” choices seem endless.
And it does not end with selecting the right choice. There are numerous tax credits available if you are alert and can squeeze into the right fact pattern. The list of federal business credits is extensive, and each state has its own menu of tax credits. Tax credits are so numerous and complex that an entire industry has sprung up willing to do tax credit studies “at no cost to you,” just a percentage of your tax savings.
So, yes, taxes are way too complex, but finding opportunities within that complexity can be rewarding and, actually, a lot of fun.
Everyone talks about simplification, but where’s the fun in that?
