Most businesses pay more tax than the law requires.
Ellis CPA is a tax strategy powerhouse. We will cut your tax to the legal minimum. Every dollar saved drops straight to the bottom line as another dollar of cash, profits and competitive advantage created out of thin air.
Tax strategy encompasses seven areas that provide lucrative tax benefits. Few tax firms can work effectively in all seven areas.
- General Tax Strategy
- Business Structures
- Intellectual Property
- R&D Credits
- Interstate Tax Strategy
- International Tax Strategy
- Professional Expertise.
Here is what is interesting about tax law. The tax code is reportedly 77,000 pages long. Add to that RevProcs, IRS Regs, court cases, Private Letter Rulings, etc., etc. and you end up somewhere around 250,000 to 350,000 pages of tax law that has been steadily growing since 1865. Within that body of law, there are inevitably thousands upon thousands of inconsistencies, differences, discrepancies, anomalies and so on and so forth that can be mined for tax savings. Nowhere in tax is there stable ground. Each component changes constantly. That's what makes the U.S. tax code a work of art.
As far as we know, we are America's premier tax strategist serving privately owned businesses exclusively. We believe we have the lowest audit rate in the country, about one audit in every 2500 returns.
There are two kinds of tax professionals. The first classification are absolute experts at the methodical process of slapping your numbers on the appropriate tax forms perfectly without error. The second classification goes beyond the methodical and puts you in position to pay the least amount of tax required by law. Something like 99.5% of tax professionals fit into the first group. Most of the remaining 0.5% are not available to private businesses because they work with Big 4 accounting firms or the Global 500. More stats here.
We use two kinds of tax strategy. The first is off-the-shelf tax strategies that we use pretty much unchanged for many clients. The other kind is custom designed to cut your tax in your particular business & personal facts & circumstances. Every customized tax strategy is unique.
Tax strategy involves mixing & matching the various components of tax law with entities & facts & circumstances to isolate the combination that yields the lowest legal tax year after year. To craft the actual tax strategy that will cut your tax to the legal minimum we mix & match tax law + facts & circumstances + an intimate knowledge of entities.We take advantage of perfectly legal deductions that nearly every privately owned business overlooks.
U.S. Tax Law is a constantly evolving matrix composed of individual tax acts passed by the U.S. Congress, the U.S. Tax Code, IRS Regulations, ligated results from the U.S. District Court, U.S. Court of Federal Claims & U.S. Tax Court, Revenue Procedures, Revenue Rulings, Internal Revenue Bulletins, Technical Advice Memorandums, Private Letter Rulings, etc., etc. The code & the individual acts define the way the law was originally passed. Everything else defines how the law is interpreted or enforced.
Interstate & International Tax Strategies
We use various Interstate & international tax strategies to take advantage of tax rate differentials. For some businesses this is like winning the lottery.
Intangible Asset Strategies
We use Intangible asset strategies for tax & asset protection. We. On ret I tangible assets like web sites & trade secrets into documented intangible assets for tax purposes and to protect them by moving them out of your operating company to another entity or personal. We can also change the way profits are taxed.
“Today, President Obama signed the Defend Trade Secrets Act of 2016 (“DTSA”) into law, bringing trade secrets alongside trademarks, copyrights and patents as intellectual property rights protected under federal law.” May 23, 2016.
Immigrate international businesses
We have an usual speciality of helping foreign or international businesses relocate to the U.S..
If it's not illegal to avoid tax, it's legal. If our government is stupid enough to create tax law that is easily avoided, that's the government's problem, not the taxpayer's. And the legislatures do that every day of the week. The issue is long solved (Judge Learned Hand), everyone has the right to arrange his affairs to pay the least amount of income tax (or other tax) possible. The tax code all by itself is reportedly 77,000 pages long. Add in litigated results, revprocs, etc. and you are probably up to 250,000 pages. In the resulting matrix, there are hundreds of thousands of anomalies, differences, inconsistencies, yadda, yadda, that an accomplished tax strategist can farm for tax strategies that cut tax way below what the average business taxpayer pays. Every accomplished professional has an obligation to insure clients don't pay more tax than the law requires. This is beyond the skills of most tax professionals, but if you are capable, that's where you have to go. That's where we go.
My take on everything tax.
I am a big fan of the U.S. tax code and U.S. tax law. I think it's veritable playground of tax saving opportunities. Throw in 50 states and it gets better. Throw in 171 countries and it becomes almost perfect. Which is the reason international companies pay less tax at lower rates than privately owned companies (GAO/SBA). Although a another, larger part of that is the general incompetence of tax professionals serving privately owned U.S. businesses.
Nowhere in tax are you standing on solid ground.
The tax code is always moving under your feet. There are 54 different individual codes in the United States Code. The Internal Revenue Code is the 26th of 54 titles in the Other codes include Armed Forces, Bankruptcy & Banking. The 53 other codes are relatively stable & unchanging.
The Internal Revenue Code is a constantly evolving matrix composed of the code itself, IRS Regulations, litigation results, Revenue Proclamations, interpretations, etc. Each of these define the way the law is interpreted or enforced. And each of them change regularly, especially when the law is new. And none of those are reflected in the original statute or the code itself. So just looking up the tax code is not enough. My research is not complete until I read articles about that specific tax law.
This article explores tax law since its inception in 1873 until today and how a proficient tax professional should work within it.
21st Century Tax Crisis.
"Privately owned firms pay more tax at higher rates than the Global 500.” (Source: NFI, IRS, Huffington Post.)
The story of U.S. taxation starts with the 16th Amendment to the Constitution.
According to the constitution & the Supreme Court, before the 16th amendment was added to the Constitution in 1913, it was illegal for Congress to tax individuals directly. Before that, Congress was required to tax the states who could then raise the money any way they wished. Never-the-less, Congress actively taxed people off and on until 1895, when the Supreme Court decided a direct income tax was unconstitutional.
In 1909 congress proposed the 16th amendment to the Constitution giving Congress the power to tax people directly. Here is the 16th amendment in its entirety.
The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states and without regard to any census or enumeration.
Would you vote for that?
Neither would anyone else.
Congress began to worry that it wouldn't pass, so they took out advertisements in newspapers around the country promising that Congress would tax only profits. That became part of the legislative history of the 16th amendment which was ratified by the Supreme Court in Glenshaw Glass and codified in section 162 of the 1954 tax code, Trade or Business Expenses. The advertisements became part of the 16th amendment’s legislative history. Courts could subsequently look to those ads to determine Congress' intent. This intent is crucial to the way the 106th amendment has been interpreted.
Individuals with no business income have a handful of tax deductions allowed by Congress. Everyone deduction or credit is a gift from Congress and it can be revoked at any time. On the other hand, for businesses, there are no limitations on what can be deducted and what can't be deducted. Nowhere does the code tell you what you can deduct and what you can't. Even if they do they do tell you what you can't deduct, you can still deduct it by recharacterizing it. For instance, health club dues become marketing. This was codified by Section 162 in 1954 tax code and passed muster with the SCOTUS in Glenshaw Glass, also in 1954.
Section 154 tells us business tax deductions must meet the tests of ordinary & necessary. Other tax legislation has expanded that requirement to ordinary, necessary & reasonable with valid business purpose and economic substance, in pursuit of profits. The IRS does not make those decisions, the business or its owner makes them. But you may have to defend them in court.
Since 1913, 90% of tax law, in one way or another, has been written in an attempt to weaken the 16th amendment.
The Tax Code
Prior to 1874, U.S. statutes were not codified. That is, the acts of Congress were not separately organized and published in separate volumes based on the subject matter (such as taxation, bankruptcy, etc.). Codifications of statutes, including tax statutes, undertaken in 1873 resulted in the Revised Statutes of the United States, approved June 22, 1874, effective for the laws in force as of December 1, 1873. Title 35 of the Revised Statutes was the Internal revenue title. Another codification was undertaken in 1878.
- Revenue Act of 1861
- 1873 tax code
- 1878 tax code
- 1939 tax code
- 1954 tax code
- 1986 tax code
- 2017 tax code ?? I assume.
In 1954 all the various tax laws that had ever been passed were codified into the 54 tax code, even preceding the 16th amendment, which became law in 1913. This code was referred to as the 54 code. This basic structure of the tax code has been identical ever since. Tax laws, which are passed every year, are simply hung like Christmas Tree ornaments on the 54 code. Few tax laws are ever repealed. Instead they are superseded. But, if they are never superseded they last forever. In 1986, during the Reagan administration, a big batch of new bills were passed as a reform package. This included 'at risk' provisions and 'passive activities' to kill a burgeoning tax shelter industry. 'Economic Substance' and 'Valid Business Purpose' arose separately as tax doctrines with the force of law. They were used to attack tax frauds such as 'Boss' & 'Son Of Boss'. People began calling it the 86 code, but the basic 54 Code structure is still the basic structure of the code and remains unchanged. Many unsupervised tax laws remain fully functional although little used. 2017 tax reform will undoubtedly be call the 2017 tax code.
So, for all 62 years Congress has been adding to our basic tax code. It started at 400 pages in 1913, the size of a decent book. In 26 years it grew only to 504 pages. Today it's more than 77,000 pages long. (An entire library of 400 page books.)
This creates a bizarre matrix of anomalies, inconsistencies, differences, conflicting individual laws, that are tied together by invisible threads. This is today's tax code.
The Tax Code Was Brilliant By Design.
The 13th amendment created two separate tax systems which have already been discussed. One for business & one for wage earners. Wages are considered profits, which excludes wage earners from deducting ordinary, necessary & reasonable expenses. Businesses & their owners have the full benefit of the 16th amendment.
The Way It Works Is Brilliant By Mistake.
Overwhelming Size & Complexity. The tax code is reportedly 77,000 pages long. Add in Regs, Rev Procs and litigated results and now it’s 240,000 pages. Add in 50 states and 172 countries and it becomes 25 million to 53 million pages.
Somewhere in here, the average tax preparer is left behind. Our genius intellect, 4+ decades experience and deep domain expertise sets us apart from the average tax preparers who were left behind after a few thousand pages. Inevitably in anything as complex and enormous as the tax codes, there are thousands, multitudes of discrepancies, differences, anomalies, inconsistencies that are breeding grounds for legal tax savings.
In addition, in some instances, such as international taxation, when you’re determining which countries to run revenues through, your database includes the 25 to 53 million pages. There are discrepancies, differences, anomalies, inconsistencies between countries as well as within tax codes that can play off each other to save tax legally. This is what you look for when creating tax strategy.
Facts & Circumstances
Here is the pecking order of the entire body of tax law. From most important to least important. The bottom of the list reflects the language passed into law. Emphasis moves up the list as government decides how to administer and enforce it.
- Facts & Circumstances. Most important.
- Revenue Procedures
- IRS Regulations
- Everything else like private letter rulings.
- Tax code.
- Individual tax acts like the Tax Cut & Jobs Act. Least important.
The tax code is unique in all other branches of law, in that as soon as the ink on a tax bill dries, the law begins morphing as the IRS, the courts & taxpayers begin determining how the act will be administered & enforced. Other branch of law goes through this kind of constant re-evaluating. This makes it very difficult to become an expert in the tax code.
It may be ever-changing, but it’s the only tax code we have. It’s identical for everyone. Taxpayers with identical earnings should get identical results. They don’t because of Facts & Circumstances & widespread incompetence throughout the professions. When facts & circumstances are introduced into the mix, the door opens to niche opportunities to save tax based on facts & circumstances.
That Is The Brilliance Of The U.S. Tax System.
That's why we have a tax industry in the U.S. The distinguishing factor between companies that are successful long term is how well they blend the two together. Most of the Global 500 have people who can blend them together well. Private companies generally don’t. That’s why the GAO reported large companies pay less tax at lower rates than privately owned companies. The same level of talent is simply not widely available to private companies. Most tax pros avoid the talent issue altogether by filing tax on the SALY (same as last year) method.
Key Tax Doctrines
The entire tax code rests on two doctrines which are not in the tax code per say, but which for all intents and purposes provide the foundation the entire tax code was based on - Economic substance & valid business purpose. Every time I think about this I am reminded of the parable about building your house on solid rock instead of shifting sand. The entire tax code was built on shifting sand. It took a Supreme Court decision, Glenshaw Glass, to place a solid foundation underneath. These two precepts lurk in the background of every tax controversy. So you need to be aware of them.
Economic substance is a doctrine in the tax law of the which a transaction must have both a substantial purpose aside from reduction of tax liability and an economic effect aside from the tax effect in order to be considered valid. It isn't valid to pursue a course of action if saving taxes is the only reason you do it. Every transaction must have an economic substance aside from avoiding taxes in order to be valid. Just satisfying the technical requirements of the code, isn't enough. You also have to pass the test of economic substance. If it doesn't, it's considered abusive. Economic substance made its way into the tax code for the first and only time in 2010 in ACA.
Valid Business Purpose
Valid business purpose raises the issue of motive on federal income tax liability. Tax avoidance "by means which the law permits" traditionally has been viewed as a legal right. Justice Learned Hand of the New York Court of Appeals made the famous statement, "It is perfectly legal to so arrange your affairs to pay the least income tax." However, for forty-five years, the Commissioner of Internal Revenue (Commissioner) has been probing taxpayers' business motives, generally with the blessing of courts. This has led to the development of the business purpose doctrine, which permits the Commissioner to reverse tax benefits for certain transactions motivated by tax avoidance or non-business purposes. Although the doctrine arose in the context of reorganizations, it was extended rapidly to other areas.- Recently, it has been discussed as a "pervasive judicial doctrine" in tax law. When and how the doctrine should be applied, however, is still the subject of controversy … because it has never been codified by adding it to the tax code.
These concepts developed organically in the courts because they were necessary to hold the tax code together. As people with uncommon abilities began working in the tax code on behalf of their clients to avoid income tax, some very bright people discovered ways to work in the seams of the tax code to follow the letter of the law but cut taxes to nothing.
That's still possible. But today you have to be aware of these two foundational precepts. People have overlooked them & gone to prison for their oversight.
There Are Three Kind Of Tax Professionals
Education based, preparation based & strategy based. The education based suffered some devaluation when Google put everything on your phone. Today, I personally do a large part of my research on Google. Preparation based pre-prepare returns. This is by far the vast majority of American tax professionals. Tax strategists make the world go around by devising means to save tax that you would otherwise pay.
In its ultimate simplicity, if you're doing everything else right, there are only three ways to save tax; move income to lower tax jurisdictions, convert personal, nondeductible expenditures into legitimate tax deductions or convert taxable income into nontaxable income. There is a fourth way that seems a little like cheating and that's to by means of tax law that targets you specifically or as part of a protected group from the maximum tax rates. For instance, Carried Interest that allows specific individuals to pay capital gains rates on ordinary income.
Tax strategy can't be learned in college. You can’t just pick up a book or osmosis. Not everyone has a strategic viewpoint. And not everyone is creative. There is only one way to learn tax strategy ... by actually doing it over a long period of time. A few years won’t do it. A couple decades may not be enough. Today, I’m now more than four decades in. Do the math. As far as I know, I’m the only tax strategist working with private businesses.
Here’s how we do it.
First we listen & learn. Then we mix & match. The result is tax strategy custom designed specifically for you. Which is exactly what Apple’s tax strategist did for them and we’ve had similar success. In the last decade, we’ve saved millions of dollars for hundreds of businesses using this process. 99% success rate.
There 28 million privately owned business & their owners, but there's only one of us.
You need us worse than we need you.
We're the prize.
If your tax preparers aren't saving you tax, what good are they?
Quote from a frustrated physician ... "Despite hiring a local CPA, I was paying excessive amounts of taxes. Even worse, every time I suggested a way to reduce my tax burden it was rejected off hand. Taxes were easily my biggest expense and I had a sinking feeling that I was overpaying. When I discussed the topic with my colleagues, they were in the same boat." Read this to understand why.
Apple’s Tax Strategy.
Apple's tax miracle.
According to the EU, Apple’s Double Irish tax strategy contributed $13 billion dollars in tax savings to fuel their growth.
According to the EU, Apple’s Double Irish tax strategy contributed $13 billion dollars in tax savings from 1991 to 2015. Under Irish law that is completely legal. But the EU is never-the-less demanding it be repaid. Ireland has joined Apple in their defense. Tim Cook's statement, "We now find ourselves in the unusual position of being ordered to retroactively pay additional taxes to a government that says we don't owe them any more than we've already paid."