Apple’s Tax Strategy

I was at the gym a couple of days ago bantering with a gal in one of the classes I take and she asked me what I did. I told her I had an accounting practice and she asked me the name but she’d never heard of us. I told her that’s because we try to keep our profile down locally. I got all the high profile I ever want during an unsuccessful campaign for U.S. Congress.  I told her we don’t have a sign on our building or on the door to our offices, but my practice is one of the largest individually owned CPA firms in the United States. We have clients in 46 states. After oooing and ahhhing for a moment, she said something very interesting. She said, you seem very … “lively” for an accountant. And of course, you all know what she meant.

Besides the issues this attitude creates for ‘unlively’ accountants, it raises a larger point more pertinent to the typical businessman about the innovations people expect from their accountants and tax advisors. They expect absolutely none.  Because they’ve never gotten anything other than ‘timing differences’ whenever they asked for tax advice. Year end tax advice is always swimming with timing differences. Unfortunately, with unlively goes dull and slow, at least in the minds of most business owners. Their tax accountants have trained them to think that way. Creativity and innovations are certainly unexpected.

That puts many business owners in the unfortunate position of having to plod along year after year paying more tax than the law requires and missing profit opportunities because they think they’re getting all you can expect from an accounting firm. But that’s not true.

Take the case of Apple. In 1998 when Steve Jobs returned to Apple, the company was three months from running out of cash and going bankrupt.  We all know the story about how Jobs pulled Apple from the brink of bankruptcy and propelled it into the most valuable company in the world.  Everybody knows about the iMac and the iPod and iTunes and the iPhone and iPad and what a great successes they were. But very few people know about the role tax strategy played and the 400 billion dollars it added to Apple’s coffers and cash balances.

Apple
Google
Amazon
GE

Tax Strategy is an essential element of each of these companies’ success. They built their cash positions and balance sheets with tax strategy.  They are all wildly successful companies, and all of them have been heavily criticized for pursuing legal, effective tax strategies.  GE’s still embroiled in controversy for paying no income tax in 2010. Google and Amazon have been heavily criticized throughout the E.U. In fact the U.K. Parliament went so far as to ‘condemn’ Google.  But Apple’s story is the most interesting.

Apple’s story is below.

It may be a coincidence that this story spans Steve Jobs’ tenure at Apple, but I don’t think so. It begins in 1997 with Jobs’ return and Apple sitting at the brink of bankruptcy.  It ends sixteen years later after the greatest turnaround in history and Jobs dead and in the grave.   From a single billion in 1997, Apples cash position had risen to $57 billion by 2010; and, as Apple’s market value had risen from $839 million to $549 billion, the company had become the most valuable company in the world.

The NYT initially broke the story in 2010, alleging, apparently inaccurately, that Apple’s effective tax rate was only 9.8%. It culminated In 2013 with Congress grilling Apple for avoiding $400 billion in tax using a “web of tax shelters” with catchy names like the ”Double Irish and a Dutch Sandwich”. Note the use of the word “avoiding” which implies it was all done legally, instead of “evading” which would imply laws were broken.

Apple had broken no laws. They will never be prosecuted for tax avoidance, because tax avoidance is not against the law. It’s human nature to avoid income tax. None of these companies had broken any laws. None of them will ever be prosecuted.

This story is not about Apple outwitting the world’s governments. The point of this story is that the biggest companies in the world are quietly and effectively sheltering their income from taxation with legal tax savings devices and tax preferences that legislators embedded in tax codes for this particular purpose. The story is about Apple cutting it’s taxes all the way to zero in many cases by taking advantage of what the world’s governments willingly provided. Many tax savings devices and tax preferences have been embedded in the U.S. Tax code by the U.S. Congress. And most businesses are leaving them unused. But not voluntarily.

In Apple’s case, newspapers have reported the company saved $400 billion in taxes. But if the truth were known, it was probably more than that. Never the less, that $400 billion went into the cash balances on their Balance Sheet and into their market value, fueling their rise to ‘the world’s most valuable company. But their tax strategies added greatly to bottom line profits and company value.  It’s a statistical fact, that $400 billion in tax savings fueled Apple’s rise to overtake Exxon Mobile as the most valuable company in the world.

Jobs obviously had no desire to contribute precious working capital to taxing authorities through faulty tax advisors.

Here’s the moral of this paper: If you want your company to break through the barrier that separates the ordinary companies from the remarkable companies that leave their mark on the universe, you need to pay a lot more attention to your income tax and your income tax advisors. If you intend to survive and thrive in the tumultuous 21st century, it’s essential to cut tax to the legal minimum. Paying more tax than the law requires is not the pathway to success.  For multinationals sophisticated tax strategy is required to keep pace with competitors.  But for closely held companies, those savings open doors otherwise closed and provide a needed burst of competitive advantage.

Tax strategy is the first prong in a four pronged approach to turning a company around. The others are ‘modern workforce management’, ‘regulatory management’ and a form of analytics we call ‘analytical accounting’ or ‘transactional analysis’.  If you’re doing this, greatness is a viable option. And so is putting your mark on the universe … a’ la’ Apple.

You can bet Apple’s tax advisors are of the lively variety.

For more information, visit our web site: www.elliscpa.us , or call: 888-241-5040.

By the way, I’m also an anarchist.

From Vox Day, via Zero Hedge

“One need not be a socialist, or oppose capitalism, to oppose the income inequality that is the result of theft. With the assistance of the Federal Reserve and Congress, the banks have financially raped the American economy and the American people through fraud and political corruption. A reckoning is overdue. Everything that has been done in the last five years has been done in order to postpone it. And yet, a reckoning is coming nevertheless, because that which cannot continue will not continue. The rich simply cannot consume enough to substitute for more equitable consumption; how many cars can a man drive? In how many homes can a man dwell?”

<a href =”http://voxday.blogspot.com/2014/02/the-dark-side-of-income-inequality.html#comment-form/”&gt; Vox Popoli

People are bitching about the income inequality between the richest 88 people in the world and the rest of us. But there are more important things out there we should be paying attention to. The worst thing about this kind of income inequality is the potential for creating a landed aristocracy. But the answer is an estate tax that prevents passing on enormous estates to heirs unhindered, or worse yet, parking them in dynasty trusts,. A few generations of heavy taxation and incompetent heirs would eliminate that wealth. You probably hate estate tax, but that is all that stands between us and a landed aristocracy. Is it really healthy to have families like the Kennedy’s and the Bush’s rise to the top of the food chain? Would it even be possible for another Lincoln to rise to the Presidency?

Kill those dynasty trusts.

Very rich people make a lot of money, but they don’t just take it away from us. We have to participate willingly for capitalism to work, and we do. After all, it’s the best system out there for delivering the goods we want for a price we can afford. The only alternative, and it’s not a very good one, is centralized planning.

The income inequality we can’t deal with so readily comes from other sources. The most egregious comes from the abuse of government and power … just because they can. In many countries, this one included, that is the big problem. People get rich just because they’re powerful enough to take it away from us. Our government first bled us dry in the name of social engineering, just because they could, just because we trusted them. Then when we were already bled dry, they drove us deeply into debt to raise the money to feed their magnificent machine, enriching themselves and their favored classes as they went. just because they could.

The only way to deal with that is political revolution. Perhaps there will never be enough opposition to put a stop to this kind of income inequality. Perhaps we can never recover. Perhaps the values we used to hold dear are gone forever. But perhaps someday people will begin rolling out the guillotines.

Just thinking.

2nd Response to potential client

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This is a second post providing insight into rainmaking in a professional firm.

After our first response, the CEO of the potential client decided he wanted to compare solutions for solving a current problem they have with their 2013 tax return.They started by interviewing three firms. They eliminated one after the first round and came back to us with a request for a specific proposal to repair their botched 2013 tax return. These are significant issues that could result in wholesale changes to their return. They wanted to see what specifically we would do so they could compare it with the other firm’s proposal. This is an odd request at the minimum, and in the most likely case, this is may be a client who may be a bit hard to get under control.

The other applicant is a local office of another national firm that has offices all over the country, as opposed to our approach. The local office is an ignored backwater that does all the shit returns for more significant offices. So I knew the guy was in over his head.

My first inclination was to to withdraw from the list of applicants. But our great and wonderful professional staff convinced me otherwise. Never-the-less, I am getting the impression this client only hears what he wants to hear and may be reluctant to take good advice, These clients can be the kiss of death because they can get in a lot of trouble and have a tendency to drag you in after them.

Here’s my response

” We don’t think it’s a wise idea to select an approach in this manner.

If you go off a proposal, you will be locking yourself into a position that may turn out not be the best solution. And if I recommended an approach without all the pertinent information, I would be doing the same thing. My inclination is to open a dialog with the IRS and let my eventual decision evolve over time depending on the concessions we get from the IRS.

There are myriads of outcomes possible, and many of those outcomes are decidedly unpleasant. If we just start, every one of those outcomes will remain in play. We believe it is a better idea to take as many of those off the table before committing to a solution. Then when we commit, we know what to expect. This doesn’t need to be solved today. We have the time to take the approach I suggest.  The IRS is still in a mess from the shutdown and tax season bearing down on them.

In addition,

Many of the tax strategies we use are reserved for our clients and we do not divulge them casually.  This keeps our clients on the cutting edge of their industry and helps them stay competitive.

All we will need is returns from the last three years, a  power of attorney and a working relationship with your company.

If you hire our firm, we will make it a priority to make corrections that result in the least damage and the best benefit to you.  But the research, time and effort that goes into a project like this cannot be done quickly enough to be put  into a proposal. This is a work in progress to find the best solution.

One more thing.

We can tell you are very concerned about selecting an accounting firm. That is obvious from the detailed approach you are taking. It is a difficult task because there is not a CEO out there with the ability to recognize competent tax and accounting talent. But this approach is not going to help you. You are just giving incompetent talent more opportunities to snow you.

That having been said, we would love to work with your company. This may not be the answer you are looking for, but our main priority is developing a working relationship with your company that results in the best outcome for you in the long run. ”

C’est  La Vie

His first response expressed his dissatisfaction with my response.  I responded as follows.

” My response will give you a good picture of our firm and how we operate.  Like I said in our meeting and in the email this morning, there are a myriad of possible approaches and results. The best way to approach them is the way I described. “

Unemployment tax … part of the dangerous mundane

Unemployment Tax – part of the dangerous mundane

Just so everyone knows.

Payments to subcontractors can be subject to unemployment tax. Just as if you paid them a W-2.

Businesses are several times more likely to be audited by the employment tax people than by the IRS, and the employment tax auditors are generally smarter because most of them are real people.  If you’re issuing 1099s to businesses, no big deal. If you are making a few pretty small payments and issuing 1099s to individuals, again, no big deal. You’re liable for the tax but they’re more likely to brush it off as incidental.  Besides it isn’t going to break the bank.

But if you are paying a large number of people for their services and issuing them 1099s instead of paychecks, the auditors will assert unemployment tax. They’re so hungry for money, they aren’t real particular about the law.

Just saying …

A client ran into this situation earlier this year and decided not to fight it. I personally think it could be defended relatively easily.  This is not difficult to mount a defense to. But, when things go to court, you never know …  But I don’t make those decisions. You do.

In fact I don’t make any of these decisions. I just think out loud.

Four things I’d like to think out loud about.

  1. If it’s industry practice, it helps a lot.  If your competitors are doing the same thing, it would put you at a competitive disadvantage to pay tax when your competitors aren’t. If you end up in a controversy you have to fight, this is a strong defense as an addendum to everything else you will be using to defend yourself.  This is a very strong issue. Many IRS regulations and court cases have hinged on this particular issue. In fact, when you scan the cases you will see this pop up time and time again. Industry Practice.
  2. If you make payments directly to corporations (i.e., Bill Jones Operating Company, Inc.) it helps because you don’t have to issue 1099s to corporations. One of the targets of one of these audits is 1099s.
  3. All these corporate or LLC businesses you’re paying have business tax deductions.  Mileage, supplies, whatever. This is another very strong defense because, the tax is supposed to be on payments for labor (personal services). If the company has any deductions at all, then the entire payment is obviously not for labor.  Part of it is for the business’ expenses.
  4. This is a practical consideration. The account to which you’re coding these payments can either attract or escape the attention of the auditors . You should all know that accounting is an art, not a science. There is no “right” account.  If you choose an account that’s realistic that won’t attract the attention of the unemployment auditors, you’ll be better off. You are under no obligation to stick your head in the noose.

Hope this helps.

Pardon any typos. I have a feeling there are some. I’m famous for my typos.

Up For Getting Screwed Again?

Up for Getting Screwed Again?

Got this from a client

This isn’t political, although if you don’t like my politics, you’ll have to learn to stomach them.  In fact, let me take a moment right here to clarify where I stand for those whom this kind of thing is important. Politics is part of my history, I’m sad to say. I ran for Congress once and came in second. I learned a lot during my two year campaign. I learned that neither Republicans nor Democrats have your interests at heart or give a rats a## what you think. Neither side can be trusted. I love the old saying, “To tell when a politician is lying, watch for his lips to move”. As far as I’m concerned, every time they open their mouths, a lie comes out.

Whatever your political leanings you’re probably opposed to paying more taxes to make life easier for a big, profitable company that pays millions of dollars in bonuses to it’s senior executives. The company I’m talking about today is the beloved J.P. Morgan, probably not near and dear to your hearts.

J.P. Morgan was recently penalized many billions by the U.S. government (that’s billions with a B) for mortgage lending abuses.  This is not unlike two thieves calling each other names, but let’s save that for another post. Today, lets concentrate on the ludicrousness here (real word).

Remember back to 2008 when the mortgage lending debacle hit the news, tore our economy to shreds and dug a hole we are still trying to crawl out of?  You may also remember that bailing out the banks with trillions of dollars wasn’t exactly a popular move. Certainly it wasn’t with me. They crammed that down our throats. You may also remember that a lot of that money was paid out in bonuses to the very managers who guided their companies to break the law and get their companies into the trouble they were in. In other words, they were getting bonuses for screwing up. And your money paid them. But they did it. And so did the government. So we have to live with it.

Now they’ve been penalized for the illegal acts they performed in the process. Normally, penalties and fines are not tax deductible. Also apparently, according to the link below, some people and some companies, particularly Wall Street Companies, can get away with deducting penalties because the government looks the other way. Which means they are actually screwing you again with the complicity of the government.  (By the way, I’m not claiming that any of that money found it’s way into the bank accounts of politicians, but that would be interesting to know.)

The link below takes you to a petition to make sure J.P. Morgan pays their taxes without being allowed to flaunt the law.

Take a look. Follow your conscience.

http://petitions.moveon.org/sign/no-4-billion-tax-break-1?source=s.em.mt&r_by=9391940

The World’s Most Productive Country

Productive countries
The U.S.?

(Graphic and article quoted courtesy of Forbes. Thank you Forbes. The editorializing is my own.)

There are some problems with the image. Hopefully you can see it. But if not, or if it’s not large enough to read, you can find it on Forbes. Follow the second link in the body below. Suffice it to say, it’s an if info-graphic of circles showing the big yellow ball on the middle right that signifies that the U.S.is the most productive country in the world. 

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I have to admit, I was surprised.  Just yesterday I read that Norway, for the fifth year in a row, has the highest standard of living. So I thought … Norway. Nope. It’s us. Although we work fewer hours than many, we have the largest GDP.

 Of course, you may remember the old saying, figures don’t lie, but liars can figure. The numbers these rankings rest on are dependent on government published numbers, and we all know that no government nor any scientist can be trusted with the truth. Never forget East Anglia.

Guess who’s second. The Netherlands. Wow. Does that make any sense? Not to me. I’ve never thought of the Netherlands as an industrial powerhouse. They’re probably including the sex trade. Isn’t that interesting? The Netherlands owes it’s standing in the world community to their hard laboring prostitutes? Could be. I wonder if the Netherlands will drop back into the pack now that the legislature over there has outlawed selling day passes for $100 guilders or whatever currency they trade in over there. Maybe it’s the Euro. Whatever it is, that was considered a real bargain, and a real boon to their tourist industry. People flew in from all over the world. If and when you staggered out of the last brothel at the end of your 24 hours, they presumably poured you on a plane and flew you home.

As you can see, economic statistics are very complex … very hard to understand.  Don’t even try.

From Forbes …

Human resources people worry a lot about worker productivity and “engagement,” a.k.a. happiness. (That’s why the Netherlands legislature took its action against day passes. Not that the prostitutes complained, but the legislature was worried about putting too much strain on the workforce.)

Back to Forbes. The circles, representing countries, are larger where workers are happier. The horizontal axis shows productivity (GDP per hour worked); the vertical, hours worked per year. The U.S. is happiest, with 30% of its workforce engaged, while its GDP per hour is a high $63. Outside the U.S., two of the happiest nations–Colombia and Brazil–are not all that productive. Perhaps they’re preoccupied with free sex.

The French and the Dutch put in short workdays and boast high GDP per hour. That sounds like the magic formula for happiness, yet fewer than 10% of them are happy. Now that is hard to understand. With a booming sex trade and short work days and the free time to presumably enjoy the burgeoning sex trade, the Netherlands are unhappy.

Of course the French are just crazy. But that raises interesting questions about the Netherlands. Are happy workers the most productive? (Click on happy workers if you can’t see the info-graphic.) Are people the most happy when they’re working? See? This can get confusing.

I don’t know if this tells us more about the state of the world’s economy, or more about how difficult it is to satisfy a Dutchman.

 www.elliscpa.us

For the uninitiates in the audience, the Netherlands and the Dutch are synonymous.  Bear with me. I invent my own words as I go. Grab a pencil to mark up your thesaurus. I used to strike out every third word. You have no idea how much more lively my writing becomes when I do that.