Double Scary

Legend holds that in 1494, an Italian friar named Luca Pacioli was sitting under an olive tree when a fruit bounced off his head. In a flash of insight, the nerdy Brother invented the "double-entry bookkeeping" system where each entry has a corresponding and opposite entry to a different account. Those entries, called debits and credits, help accountants avoid headaches — if the debits and credits don't balance, there's a mistake somewhere. (Some of you may be thinking, wasn’t that Sir Isaac Newton with the apple inventing gravity, but this is our story and we're sticking to it.)

Double-entry bookkeeping has ruled accounting for over 500 years. We see it everywhere today, including in our tax code. Revenue flows in, balanced by expenses flowing out. Anything left over eventually winds up in the "taxable income" account.

Sometimes, with taxes, that balance breaks down, and many of those disconnects spell opportunity. Real estate investors, for example, can depreciate the price of their properties over time. (We can help you with "cost segregation" strategies to do it even faster.) In the tax code's ideal world, you'll repay those breaks down the road by "recapturing" them as income when you sell. But with tax-free exchanges, stepped-up basis, and other strategies to avoid that reckoning, most of those depreciation deductions never get recaptured at all.

Now it's Halloween: America's second-favorite, and second-priciest, holiday. The National Retail Federation reports we’ll drop $12 billion on the spooky season this year, or over $100 per family. That includes $3.8 billion on costumes, $3.8 billion on decorations (including everyone’s favorite, the Home Depot 12-foot skeleton), $3.5 billion on candy, and $500 million on greeting cards. (Fun fact: Halloween candy is cheapest exactly four days before the 31st.) How does all that fit into Luca Pacioli's neat little boxes? Well, it gets scary the minute the greedy little trick-or-treater on the other side of your door goes running down your sidewalk with their loot!

Here's the disconnect. The candy company sells sweets to a retailer. That's a taxable transaction. The retailer sells them to you. That's another taxable transaction. But then you just give the sugary treasures to the amped-up little goblins, pirates, and princesses on your porch. No deduction for you, no income for them, no 1099s for the IRS. (Ugh. Can you imagine the 1099s?) That removes everything from the IRS's world of debits and credits. Seriously, if the IRS taxed kids on their Halloween candy, they could collect enough to cover free dental care for everyone.

It's all very ironic because, as any parent knows, Halloween is an exercise in managing another accounting term called “wasting assets.” Your kids stagger home with bulging bags of candy and dreams of sugar highs lasting until Thanksgiving. But pretty soon the good stuff is gone. No more Kit-Kats, no more Snickers! They're left with a couple of "fun-size" Milky Ways, some of those sad little Jolly Ranchers nobody really likes, and a few stale candy corns. At that point, you "charge off the goodwill" by throwing out the sticky dregs while they're at school and hoping the kids don't even notice.I

Today, your average accountant or tax professional focuses their effort on making sure the debits match the credits. It’s scary how much they can leave on the table! That’s why we don’t stop with telling you how much you owe. We take the time to look for those tax "disconnects" to make your income disappear like your kids’ candy. There's nothing scary about it at all. So call us when you're ready to pay less. You'll think the savings are pretty sweet!