Carrots Versus Sticks
Take a look at our Internal Revenue Code. No, really, take a good look. (You can buy it on Amazon for just $161.89: two thick paperbacks totaling 4,968 pages. You even get free Prime shipping!) At first glance, it’s all about the revenue. For FY 2019, federal income taxes should hit nearly $1.7 trillion. Payroll taxes will top $1.2 trillion. Corporate taxes, $225 billion. And estate taxes will generate somewhere around $20 billion, depending on how many billionaires die (#dropinthebucket).
But taxes aren’t just about the revenue. Washington loves to use taxes to accomplish goals they can’t legislate directly. This generally takes the form of “tax expenditures” — special deductions, credits, or other rules designed to benefit specific favored activities or taxpayers.
The mortgage interest deduction may be the most famous of these carrots. For most people, homeownership is a cornerstone of the American Dream. But Congress would be hard-pressed to pass legislation requiring it, or even directly rewarding it. (Buy a home! Get a free $5,000 Target gift card!) So instead, they use taxes to subsidize it. For 2018, homeowners saved $68.1 billion by deducting mortgage interest on their taxes.
But every so often, the government uses taxes as a stick . . . or at least they try to. Last week, the Wall Street Journal published an editorial blowing the whistle on one such effort that may violate the First Amendment. Specifically, it accuses the IRS of punishing nonprofit organizations that advocate for legal marijuana:
“The innocuously named Revenue Procedure 2018-5 contains a well-hidden provision enabling the Service to withhold tax-exempt status from organizations seeking to improve ‘business conditions . . . relating to an activity involving controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by federal law.’ That means that to obtain tax-exempt status under any provision of the Internal Revenue Code’s Section 501 — whether as a charity, social-welfare advocacy group or other type of nonprofit — an organization may not advocate for altering the legal regime applicable to any Schedule I or II substance.”
Bottom line, according to the authors: “The IRS seeks to control independent policy advocacy. That’s something the federal government may not do.” If they can’t prohibit the speech directly, they can’t use the tax system to do it indirectly.
Yes, “the devil’s lettuce” is still prohibited under federal law. But 33 states have passed laws legalizing it in some form or another. It says a lot that the buttoned-down stiffs at the Wall Street Journal could publish the same editorial as the stoners at High Times magazine. So why would the IRS choose to wield this particular stick? And is it really the IRS’s job to make those sorts of decisions anyway? Isn’t the IRS just supposed to be the government’s bill collector?
As far as we’re concerned, we don’t care what motivates you more, carrots or sticks. We just want to make sure you get all the breaks the law allows. But we can’t do it if you don’t ask us. So pick up the phone before time runs out to save in 2018, and lets see how we can put the rules to work for you!
Photo Credit: Alan O’Rourke [Creative Commons 2.0], via Creative Commons
Donna Bordeaux, CPA with Calculated Moves
Creativity and CPAs don’t generally go together. Most people think of CPAs as nerdy accountants who can’t talk with people. Well, it’s time to break that stereotype. Lively, friendly, and knowledgeable can be a part of your relationship with your CPA as demonstrated by Donna and Chad Bordeaux. They have over 50 years of combined experience as entrepreneurial CPAs. They’ve owned businesses and helped business owners exceed their wildest dreams. They have been able to help businesses earn many times more profit than the average business in the same industry and are passionate about helping industries that help families build great memories.