Duvall & Associates, Inc.
BUSINESS ADVISOR NEWSLETTER
 

Nothing in life is free from the tax man

- by Alan Duvall 

Published in Dayton Daily News January 29, 2006  

The legend of Al Capone ended with a tax whimper when he could not explain how he had accumulated millions dollars of stuff when he had never reported any income.   

If you receive something for nothing – the something is taxable unless an exemption exists. 

Income. Gifts. Loans – Three tax classifications for stuff individuals receive from other individuals. 

Stuff received for rendering services or selling products is generally taxable income.  

Gifts are not taxable.  Individuals can make up to $11,000 tax-free gifts to other individuals per year.  Annual gifts in excess of $11,000 can still be tax-free, but reduce donor estate tax exemptions in later years.  One break – all gifts to spouses are tax-free so go out now and buy her a new diamond.  

Loans are also not taxable.  However, if an initial loan is later forgiven or simply not paid – again you have received something for nothing and the act of non-payment converts the loan to a taxable event. 

Just ask Dennis Kozlowski, convicted ex-CEO of Tyco International.  He received about $25 million loans from Tyco – loans later forgiven and never repaid.  Because he conveniently forgot to include the debt forgiveness on his personal tax return – he is currently contemplating his decision in prison.  

Income. Dividends and stock payments. Loans – Three tax classifications for stuff individuals receive from corporations. 

Again payments for services rendered or goods sold are taxable.   

Loans are not taxed if repaid.  Thus, loans can be a convenient way for businesses to make payments, but withhold final tax classification until later determined whether repayment will be demanded. 

Dividend and stock payments are taxed, but at temporarily beneficial 15 per cent federal rates. 

Corporations cannot make non-taxed gifts to individuals or other companies.     

Somehow, this fact was initially lost on Oprah when she generously gifted 276 “free” cars to her audience.  The autos, worth about $30,000 each, cost each happy recipient $5,000 to $11,000 in income taxes depending upon respective tax brackets.  And if Oprah subsequently handed out a check for taxes to each beneficiary – that check would be taxed as well. 

Sigh.  There truly is no free lunch – or auto. 

Alan Duvall is a certified public accountant in Dayton.  Contact him at Alan@Duvallcpa.com.