October 2015

Common Tax-Planning Questions

October 30, 2015 | By: Robert A. Green, CPA

Here are the top questions we often ask our clients. Consider your answers and contact us to find out if there are specific tax moves you should make before year-end. Read our year-end tax planning series: Smart Tax Saving Moves For 2015Retirement Plan Strategies for 2015 and Tax Moves for Business Owners in 2015.

  1. Should you sell some losing investment positions to offset capital gains (tax loss selling) before year-end?
  2. Do you have a wash sale loss problem and can you fix all or part of it for 2015?
  3. Have you done whatever you can to use up capital loss carryovers?
  4. Have you maximized long-term capital gains rate benefits?
  5. Should you form a trading business entity to unlock employee-benefit plan deductions including health insurance premiums and a retirement plan?
  6. When is it too late to form an entity in 2015 and consider one instead for Jan. 1, 2016?
  7. How can you maximize employee-benefit plan deductions by year-end?
  8. If you have high income, is a defined benefit plan better than a defined contribution plan?
  9. Will you get good bang for the tax buck on purchasing new equipment before year-end?
  10. Do you qualify for trader tax status (business expense) in 2015 or will you qualify in 2016?
  11. Should you elect Section 475 MTM in your new entity within 75 days of inception?
  12. Is Section 988 ordinary treatment or Section 1256(g) capital gains treatment better for your forex trading through year-end?
  13. Is a Roth IRA conversion a good idea for you before year-end?
  14. Is an NOL carry back or carry forward better or should you soak up the NOL with a Roth IRA conversion in the current year?
  15. What tax brackets are in you in for 2015 and should you defer or accelerate income at year-end?
  16. Do you face an underestimated tax payment penalty and what can you do to avoid it?
  17. Are you avoiding tax hikes on upper-income taxpayers including Obamacare Net Investment Tax as best you can?

 


Tax Moves For Business Owners In 2015

October 28, 2015 | By: Robert A. Green, CPA

A cash method business can often accelerate or defer sales, billing and collection of revenue around year-end. If they sell their business or assets they can either use the installment method to defer capital gains, or elect out of that method to report the entire capital gain in the current tax year.

Businesses can accelerate or defer purchases of fixed assets and expenses around year-end as well. And, they have many options for how to depreciate and amortize fixed and intangible assets, respectively.

Accrual-method businesses can delay providing goods or services to customers until after Jan. 1. There are also special rules allowing accrual method taxpayers to deferring revenue received in advance of shipment of goods or services. Read about other smart moves for operating businesses on The Tax Advisor.

Keep an eye out on “tax extenders”on depreciation discussed in our blog post Smart Tax Savings Moves For 2015. Traders don’t often exceed old rules (which currently apply for 2015) allowing up to $25,000 of purchases for Section 179 (100%) depreciation whereas other types of businesses certainly do. The 50% bonus first-year depreciation deduction also lapsed but businesses can use the half-year conversion to similar effect.

If you expect debt cancelation and expect related debt-cancelation taxable income, it may pay to defer that taxable event to 2016.

Payroll and self-employment taxes
An operating business can use the S-Corp structure to reduce payroll taxes by 50% or more (subject to new guidance pending from the IRS). S-Corps don’t pass through self-employment income (SEI) triggering self-employment (SE) tax as partnerships and sole proprietorships do. Consider the SE tax reduction loophole for management companies and other types of business.

Traders use a S-Corp trading company (or C-Corp or S-Corp management company along with a trading partnership) to unlock employee-benefit plans including retirement and health insurance premium deductions. Sole proprietor traders can’t have these tax breaks. It’s hard to arrange them on trading partnership returns.

Both payroll and Solo 401(k) retirement plans must be executed or established before year-end. A SEP IRA can be established up until the due date of the tax return including extensions, although a Solo 401(k) is a much better plan for traders. Learn more in our blog post Retirement Plan Strategies For 2015.


Retirement Plan Strategies For 2015

| By: Robert A. Green, CPA

forbes_logo_main

Click to read Green’s post on Forbes

There’s still ample time in 2015 to rearrange the timing of your investments, trading, retirement and business affairs to improve your overall taxes for 2015 and surrounding years.  In this second blog post of our year-end tax planning series I focus on retirement plans.

Retirement plans for traders can be used several ways. You can trade in the retirement plan, build it up with annual tax-deductible contributions, borrow money from it to start a trading business and convert it to a Roth IRA for permanent tax-free build-up. Whatever the use, traders often need help through these important planning opportunities. There are plenty of pitfalls to avoid like early withdrawals subject to ordinary income tax rates and 10% excise tax penalties, and penalties on prohibited transactions.

Tax-advantaged growth
Many Americans invest in the stock market through their 401(k), IRA or other types of traditional retirement plan. Capital gains and losses are absorbed within the traditional retirement plans with zero tax effect on current year tax returns. Only withdrawals (or distributions) generate taxable income at ordinary tax rates. The retirement plan does not benefit from lower long-term capital gains rates. Traditional retirement plans aren’t disenfranchised from deducting capital losses, since a reduction of retirement plan amounts due to losses will eventually reduce taxable distributions accordingly.

Defined contribution plan vs. defined benefit plan
Most private companies switched to defined contribution plans, whereas public-sector unions still use richer defined benefit plans. In a defined contribution plan, the contribution is defined as a percentage of compensation, whereas in a defined benefit plan, the retirement benefit itself is defined.

If you own and operate a small business, consider a Solo 401(k) defined contribution plan. It combines a 100% deductible “elective deferral” contribution ($18,000 for 2015) with a 25% deductible profit-sharing plan contribution on an employer-level plan. There is also a “catch up provision” ($6,000 for 2015) for taxpayers age 50 and over. Together, the maximum tax-deductible contribution is $53,000 per year and $59,000 including the catch up provision (based on 2015 and 2016 IRS limits).

Consistently high-income business owners, including trading businesses with owner/employees close to age 50, should consider a defined-benefit retirement savings plan (DBP) for significantly higher income tax and payroll tax savings vs. a defined-contribution retirement savings plan (DCP) like a Solo 401(k). Read our blog post Defined-benefit plans offer huge tax breaks.

Get started before year-end
Contact your tax advisor in early November as these plans take time to consider, establish and fund. Several large online brokers offer Solo 401(k) plans, otherwise known as Individual 401(k)s. Paychex, our recommended service provider for payroll tax compliance, also offers the Solo 401(k) product and integrates it with payroll tax compliance. The Paychex Solo 401(k) product contains the plan loan feature, whereas I only know of one large broker that also offers a plan loan feature (TD Ameritrade). Direct-access trading is allowed with all these options. (Paychex has a team dedicated to GreenTraderTax clients – brochure.)

Only a few top brokers offer a defined benefit plan product.

Solo 401(k) defined contribution plans and defined benefit plans must be established before year-end, so get started by early December. IRAs can be established and funded after year-end by April 15. A SEP IRA can be established and funded by the due date of the tax return including extensions, so if you miss the Solo 401(k) deadline, that could be a last resort option.

A Solo 401(k) is better for most traders in most situations than a SEP IRA, because it has a 100% deductible elective deferral in addition to profit sharing plan and the SEP IRA only has the profit sharing plan. In a Solo 401(k), it takes a lower amount of wages to maximize the higher contribution amount versus a SEP IRA. Because traders are in control of the compensation amount they can achieve a higher income tax benefit versus a lower payroll tax cost with a Solo 401(k).

Contributions to IRAs
Traditional and Roth IRAs allow a small annual contribution if you have earned income: $5,500 per person if under age 50 and $6,500 if 50 and older (2015 and 2016 limits). If you (and your spouse) are not active in an employer-sponsored retirement plan, or if either of you are active but your modified adjusted gross income (AGI) doesn’t exceed certain income limits, you may contribute to a traditional tax-deductible IRA.

Non-deductible IRA. If you have earned income, you should also consider making a non-deductible IRA contribution, which doesn’t have income limits. The growth is still tax deferred and you are not taxed on the return of the non-deductible contributions in retirement distributions. The general rule applies: If you deduct the contribution, the return of it is taxable, but if you don’t deduct the contribution, the return of it is non-taxable. Income growth within the plan is always taxed unless it’s inside a Roth IRA.

Contributions require SEI or wages
Many traders are interested in making tax-deductible contributions to retirement plans for immediate income tax savings in excess of payroll tax costs and to actively trade those accounts with tax deferral and growth until retirement. But, there is an obstacle: Trading gains and portfolio income are not self-employment income (SEI) or compensation, either of which is required for making contributions to a traditional or Roth retirement plan. (The exception to this is futures traders who are full-fledged dealer/members of options or futures exchanges; their individual futures gains are considered SEI.) You can overcome this obstacle with a trading business entity — S-Corp trading company or C-Corp management company — paying compensation to the owner/trader. This strategy does not work for investment companies, though.

Early withdrawals vs. a qualified plan loan
If you need to withdraw money from a traditional retirement plan before retirement age 59 ½ for IRAs and age 55 for a 401(k), in addition to the distribution being taxable income, you’ll probably owe a 10% excise tax penalty subject to a few limited exceptions (Form 5329). In lieu of an early withdrawal, consider a loan from a qualified plan like a Solo 401(k). IRAs are not qualified plans and loans would be a prohibited transaction blowing up the IRA, making it all taxable income. You can borrow up to the lower of $50,000 or 50% of plan assets, and you must repay the loan with market interest over no longer than five years and a quarterly basis.

Required minimum distributions
Per Thomson Reuters, “Take required minimum distributions (RMDs) from your IRA or 401(k) plan (or other employer-sponsored retired plan) if you have reached age 70½. Failure to take a required withdrawal can result in a penalty of 50% of the amount of the RMD not withdrawn. If you turned age 70½ in 2015, you can delay the first required distribution to 2016, but if you do, you will have to take a double distribution in 2016 — the amount required for 2015 plus the amount required for 2016. Think twice before delaying 2015 distributions to 2016 — bunching income into 2016 might push you into a higher tax bracket or have a detrimental impact on various income tax deductions that are reduced at higher income levels. However, it could be beneficial to take both distributions in 2016 if you will be in a substantially lower bracket that year.”

Roth retirement plans and conversions
A Roth retirement plan is different from a traditional retirement plan. The Roth plan has permanent tax savings on growth, whereas the traditional retirement plan only has deferral with taxes owed on distributions in retirement. Distributions from a Roth plan are tax-free unless you take an early withdrawal that exceeds your non-deductible contributions to the plan over the years (keep track well).

Consider annual contributions to a Roth IRA. The rules are similar to traditional IRA contributions. Also, consider a Roth IRA conversion before year-end 2015 to maximize use of lower tax brackets, offset business losses and fully utilize itemized deductions.

Here’s an example: Assume a trader left his job at the end of 2014 and incurred trading losses in 2015 with trader tax status and Section 475 MTM ordinary loss treatment as a sole proprietor. Rather than carry back an NOL that could draw IRS attention, or carry forward the NOL to subsequent years when income isn’t projected, this trader rolls over $300,000 from his prior employer 401(k) to a Rollover IRA and enacts a Roth IRA conversion for $300,000 before year-end. He winds up paying some taxes within the 15% ordinary tax-rate bracket. If the trader skipped a Roth conversion, he would lose tax benefits on his itemized deductions including real estate taxes, mortgage interest, charity, and miscellaneous itemized deductions. This trader’s Roth account grows in 2016 and he chooses to skip a recharacterization. (If a recently converted Roth account drops significantly in value in the following year, a taxpayer may reverse the Roth conversion with a “recharacterization” by the due date of the tax return including extensions (Oct. 15).

Also, after recent market corrections in indexes and many individual stocks, consider a Roth conversion at lower amounts to benefit from a potential recovery in markets inside the Roth IRA where that new growth is permanently tax-free. Converting at market bottoms is better than market tops.

DOs and DON’Ts of using IRAs and other plans
Learn the DOs and DON’Ts of using IRAs and other retirement plans in trading activities and alternative investments (read our blog post). Many traders may be triggering IRS excise-tax penalties for prohibited transactions including self-dealing and/or UBIT (unrelated business income tax) by using their IRAs and other retirement funds to finance their trading activities and alternative investments. Spot these problematic schemes early, like the IRA-owned LLC. Avoid “blowing up” your IRA, which means it becomes taxable income; plus there are severe penalties.

When it comes to retirement plans and tax savings, it’s wise to do tax planning well before year-end to maximize your available options. The door closes on many at year-end.


Smart Tax Saving Moves For 2015

October 23, 2015 | By: Robert A. Green, CPA

forbes_logo_main

Click for Green’s post on Forbes

There’s still ample time in 2015 to rearrange the timing of your investments, trading, retirement and business affairs to improve your overall taxes for 2015 and surrounding years.

Tax planning may be challenging, but it pays off
With plenty of moving parts, graduated tax rates and a long list of loopholes, tax breaks and penalties, you’ll need extra diligence for tax planning this year. Upper-income individuals must contend with AMT, Obamacare NIT and AGI-based phase-outs of tax breaks on itemized deductions, personal exemptions and credits.

We focus on traders, investors and investment managers and with volatile financial markets in 2015, many experienced wide swings in income and losses. Several face an unfamiliar tax landscape, such as much higher income and not realizing or setting aside higher taxes with surprises like Obamacare NIT; or huge losses, missing a timely Section 475 election for business ordinary loss treatment and getting stuck with significant capital loss carryovers.

Traders have special issues to contend with
Wash sales: Securities traders must comply with onerous wash sale loss rules (Section 1091) and brokers make it more difficult for them by applying different rules from taxpayers on tax reports and Form 1099-Bs. Taxpayers must report wash sales on substantially identical positions across all accounts, whereas brokers report only identical positions per account. Use TradeLog to identify potential wash-sale loss problems. Break the chain by selling the position before year-end and not buying a substantially identical position back 30 days before or after in any of your individual taxable or IRA accounts. (Starting a new entity effective Jan. 1, 2016 can break the chain on individual account wash sales at year-end 2015 providing you don’t purposely avoid wash sales with the related party entity.)

Section 475 elections: Business traders qualifying for trader tax status like Section 475 on securities for exemption from wash-sale rules and capital loss limitations. Section 475 ordinary losses contribute to NOL refunds. Individuals and existing partnerships can elect Section 475 by April 15, 2016 for 2016 (March 15 for S-Corps).

Trading entities: A “new taxpayer” entity can elect Section 475 within 75 days of inception. Consider that for 2015, especially later in the year. But it’s too late to form a new trading entity by late November and still qualify for trader tax status in that short period before year-end. Unlock employee benefit plan deductions for traders with an S-Corp trading company or C-Corp management company with a trading partnership. Sole proprietor traders can’t have employee-benefit plan deductions since trading income is not self-employment income (SEI). An entity formed late in the year can unlock employee-benefit plan deductions for an entire year by paying officer wages in December.

Trader tax status (TTS): If you qualify for TTS (business expense treatment — no election needed) in 2015, accelerate trading expenses into that qualification period as a sole proprietor or entity. If you won’t qualify until 2016, defer trading expenses until then. You may also capitalize and amortize Section 195 startup costs in the new business, going back six months before commencement. Business expense treatment is far better than investment expense treatment. Investment expenses are part of miscellaneous itemized deductions which are only deductible in excess 2% of adjusted gross income (AGI) and are non-deductible for AMT. If you are stuck with investment expense treatment, try to bunch expenses into one useful year rather than two. The bunching strategy may also be effective for medical expenses and other itemized deductions.

Fill the gaps in tax brackets
If you own an investment portfolio, you have the opportunity to do tax loss selling or the reverse by selling winning positions for capital gains.

Traders like to study investment charts, and they should also study the IRS charts for tax rates with graduated tax brackets, Social Security and retirement contribution limits, standard deductions, exemptions and more. See Tax Rates and other tax charts in our Tax Center. There are significant differences in the charts for filing status: single, married filing joint, married filing separate and head of household. Did you change your filing status in 2015?

Focus on the ordinary income and long-term capital gains brackets. Consider accelerating income and deferring expenses to fill a gap in a bracket before entering the next higher tax bracket. Or, defer income and accelerate expenses to drop down a marginal tax bracket. Just keep an eye out for triggering AMT, a minimum tax rate.

Miscellaneous considerations for individuals

  1. Note inflation adjustment increases to rate brackets and more.
  2. Consider your time-value of money when considering acceleration or deferral of tax payments.
  3. Consider estimated tax payment rules including the safe-harbor exceptions. If you accelerate income, you may need to pay Q4 2015 estimated taxes by Jan. 15, 2016.
  4. Alternatively, increase tax withholding on wages to avoid estimated tax underpayment penalties.
  5. If you still need to avoid estimated tax underpayment penalties, arrange a rollover distribution from a qualified retirement plan with significant tax withholding before year-end. Next, rollover the gross amount into a Rollover IRA. The result is zero income and avoidance of an estimated tax penalty.
  6. Consider year-end gifts of appreciated property to family members within the annual gift exclusions ($14,000 for 2015) to shift income. Consider the “kiddie tax” rules.
  7. Sell off passive loss activities to unlock and utilize suspended passive-activity losses.
  8. Maximize contributions to retirement plans.
  9. The IRS has many obstacles to deferring income including passive-activity loss rules, a requirement that certain taxpayers use the accrual method of accounting, and limitations on certain itemized deductions like investment interest expense and charitable contributions.
  10. Individuals on the cash method get credit for purchases charged to their credit card by Dec. 31.

Long-term capital gains rates are lower than most people think
If you are married filing joint and your taxable income is under the 2015 15% ordinary bracket $74,900 maximum, you have zero federal taxes on long-term capital gains income. For example, if your taxable income is $60,000, you can sell a security held over 12 months for a $14,900 long-term capital gain and not pay any additional federal tax on that capital gain. (For a single filer, the corresponding 2015 15% ordinary bracket maximum is $37,450 of taxable income.)

Long-term capital gain graduated rate brackets:
Zero for the 10% and 15% ordinary rates,
15% above the 15% ordinary rate, except,
20% in the 39.6% top ordinary rate.

Match short-term vs. long-term capital gains and losses
It’s not tax efficient to do “tax-loss selling” on short-term positions while eating into lower long-term capital gain rate benefits — in other words, to offset short-term capital losses against long-term capital gains. The IRS rules for accounting for the two separate buckets can be confusing. Read last year’s tax planning blog 2014 year-end tax planning for traders point #10.

Qualified dividends are taxed at long-term capital gains rates
Another beauty left over from the Bush-era tax cuts is the rule for qualified dividends taxed at lower long-term capital gains rates: A fiscal incentive was given to long-term investors who hold dividend-paying stocks. As pointed out above, the long-term capital gains rate tax break transcends all tax brackets; it’s not just for the upper-income.

How to qualify: To be a qualified dividend, the dividend must be paid from a domestic corporation or certain (“qualified”) foreign corporation. The taxpayer must hold common stock for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date. For preferred stock, the holding period is 90 days during the 180-day period beginning 90 days before the stock’s ex-dividend date.

The long-term capital gains rate affects futures trading, too
Section 1256 contracts (including futures, broad-based indexes and non-equity options) are subject to 60/40 capital gains tax rates and mark-to-market accounting: 60% is long-term even on day trades and 40% is short-term taxed at ordinary rates. The blended 60/40 rate in the top bracket is 28%. That’s 12% less than the top ordinary rate of 39.6%.

With zero long-term rates in the 10% and 15% ordinary brackets, there is meaningful tax rate reduction throughout the brackets. In the 15% ordinary tax bracket, the blended 60/40 rate is 6%. (Here’s the math: 60% LT x 0% LT rate = 0%. Plus, 40% ST x 15% ST rate = 6%.) In the 10% ordinary tax bracket, the blended 60/40 rate is 4%. States don’t apply a long-term rate, so regular state tax rates apply. Tax Foundation has a useful chart on top federal and state capital gains tax rates.

Instead of day or swing trading the Nasdaq 100 ETF (Nasdaq: QQQ) taxed as a security at ordinary rates, consider trading the Nasdaq 100 emini index (CME: NQ), a Section 1256 contract taxed at lower 60/40 tax rates. There’s also a Section 1256 loss carry back election allowed to apply the loss in the prior three tax years against Section 1256 gains only.

AGI-based phase-outs and tax rates
It’s not always evident whether it’s better to defer or accelerate income, loss and expenses. Consider AGI-based phaseouts of various tax breaks and effective use of marginal tax brackets in the current and surrounding years.

AGI-based phaseouts include the 2% AGI threshold for miscellaneous itemized deductions, which includes investment expenses, the Pease itemized deduction limitation on upper-income taxpayers, child and dependent care tax credits, higher education tax credits, deductions for student loan interest and allowed deductible IRA contribution limits.

Alternative tax regimes NIT and AMT
The Patient Protection and Affordable Care Act has many new and different types of taxes to finance the law, starting on different dates. One of these new tax regimes — the “Net Investment Income Tax” (NIT) originally referred to as “ObamaCare 3.8% Medicare surtax on unearned income” — affects upper-income taxpayers as of Jan. 1, 2013. It only applies to individuals with net investment income (NII) and modified AGI exceeding $200,000 (single), $250,000 (married filing jointly) or $125,000 (married filing separately). (Modified AGI means U.S. residents abroad must add back any foreign earned income exclusion reported on Form 2555.) The tax also applies to irrevocable trusts (and estates) on the undistributed NII in excess of the dollar amount at which the highest tax bracket for trusts begins (this amount is $12,300 in 2015).

Try to defer income and accelerate expenses to reduce MAGI under the NIT threshold above. In calculating NII, deduct properly allocated expenses including but not limited to trading and investment expenses. If you are stuck over the MAGI threshold, try to reduce NII to reduce NIT. There’s also a 0.9% Medicare tax that applies to individuals receiving wages in excess of $200,000 ($250,000 for married couples filing jointly and $125,000 for married couples filing separately).

If you are in a lower income situation and purchase health insurance on an Obamacare exchange, consider how deferral or acceleration of income might affect your current and subsequent year exchange subsidies on Form 8962 (Premium Tax Credit). You don’t want to owe expensive subsidies back to Treasury.

The Alternative Minimum Tax (AMT) was enacted in 1982. Originally intended as a second tax regime to prevent the rich from avoiding most income tax, with lack of indexing for inflation, AMT has exploded on the upper middle-class, too. The AMT rates are 26% and 28%, which are not bad compared to the top regular income tax rate of 39.6%. Many tax advisors suggest that upper income individuals enjoy the AMT rate and accelerate income to pay 28% rates when they can, rather than higher ordinary tax rates. Just don’t bother accelerating deductions that are non-deductible for AMT (as preferences). AMT preferences include real estate and property taxes, state income taxes, miscellaneous itemized deductions and personal exemption deductions. Medical expenses are calculated in a more restrictive way for AMT for taxpayers over age 65. Congress passed the AMT patch (inflation adjustment) for 2015 earlier in the year, rather than wait until year-end as is par for their course.

Will Congress renew lapsed tax extenders?
There’s a long list of temporary tax breaks that Congress can’t afford to write into permanent tax law, even with a sunset provision since it would bust the budget. Each year, Congress has dealt with this mini-fiscal cliff to renew these so-called “tax extenders.”

Per Thomson Reuters, “These tax breaks include, for individuals: the option to deduct state and local sales and use taxes instead of state and local income taxes; the above-the-line-deduction for qualified higher education expenses; tax-free IRA distributions for charitable purposes by those age 70-1/2 or older; and the exclusion for up-to-$2 million of mortgage debt forgiveness on a principal residence. For businesses, tax breaks that expired at the end of last year and may be retroactively reinstated and extended include: 50% bonus first year depreciation for most new machinery, equipment and software; the $500,000 annual expensing limitation; the research tax credit; and the 15-year write off for qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property.”

They lapsed at year-end 2014 and I suspect Congress will renew them again around year-end 2015. Perhaps a GOP-led Congress won’t want to affect the 2016 presidential and Congressional elections by upsetting so many taxpayers without a renewal. Neither will President Obama and Democrats. Tax reform is more important and a bigger issue which can include tax extenders but it’s doubtful Congress can address tax reform until 2017 when the next Congress and President take office

Consult your tax advisor
If your tax planning is complex, consider having your CPA prepare a draft tax return to weigh the different “what if” scenarios and options. Many CPAs like our firm use professional tax planning software making the process easier and more effective. If you are a securities trader, run TradeLog accounting software year to date and use its Potential Wash Sale Loss report to avoid wash-sale loss conditions at year-end. Give your CPA a chance to save you some big bucks!

Stay tuned in the next couple days for more blog posts with helpful advice for 2015!

 


Human Jobs Under Attack By Tax Code Favoring Robots Over People

October 4, 2015 | By: Robert A. Green, CPA

forbes_logo_main

Click for Green’s post on Forbes

Hopefully, a presidential candidate or Congress will consider my tax idea to spur jobs with a new depletion allowance on human labor. Similar in concept to the depletion allowance on oil and gas, it would be an annual tax deduction for a portion of the value of the underlying energy resource. Per Mineral Web, it’s “the using up of a natural resource.” I’m sure many human workers feel used up after a lifetime of hard work, too.

Rise of Robots
In his breathtaking new book on modern economics, “Rise of the Robots: Technology and the Threat of a Jobless Future,” author Martin Ford explains how robots and IT replace human white-collar and blue-collar jobs. This trend is a major contributor to the “new normal,” a frightening low labor participation rate (62%), and a higher U.S. (broad U6) unemployment rate (10%).

Ford points out that robots work faster and longer and more intelligently with fewer errors and with fewer collateral issues than humans. Robots — with artificial intelligence (AI), algorithms and access to big data — are replacing white-collar jobs in law (data mining), finance (high-frequency trading), health care (Dr. Watson IBM), education, science and business. While you may not yet shake hands with a robot that looks like a human, robot systems are working broadly behind the scenes in almost everything we do today.

Ford points out it’s no longer a competitive playing field with robots either winning new jobs or making it possible for virtual immigration of foreign workers, both of which replace U.S.-based jobs.

While the rise of robots is generally a good thing, Ford points out that as a society we should value sustainable jobs for the middle-class, not to slow down advances and adoption of robotics, but to incentivize businesses to hire humans to work side-by-side with robots. Ford argues that income inequality is accelerating with robots since productivity-induced profits go to business owners and investors. Robots don’t buy cars; they are self-driving cars. Robots don’t consume food, medicine and consumer products, and they don’t sustain a consumption-driven economy.

Tax policy favors robots over people
U.S. tax policy favors capital spending on robots, technology and energy over human resources. Businesses benefit from generous Section 179 (100%) depreciation (cash expensing) and bonus depreciation on purchases of technology and tax credits on R&D (research and development) in biotech, software development and more. These tax breaks are among the largest “tax extenders” expected to be renewed again by Congress later this year.

Current fiscal policy for U.S.-based human resources is unattractive. Employers must contribute to Social Security, Medicare, federal and state unemployment insurance, state workers’ compensation, Obamacare health insurance, retirement plans and other employee benefit plans.

In 2011, many people called for a payroll tax holiday and Congress enacted a partial reduction on the employee portion of Social Security contributions. I suggested a full payroll tax holiday on the employer portion, too. But Social Security and Medicare are facing insolvency and a tax holiday accelerates the problem. Consider my idea for a human depletion allowance, instead.

Depletion allowance on human resources
Jobs for Americans are worth more than energy, which is currently in abundance. American workers feel used up just like oil resources. Big oil and gas won and continues to defend its depletion allowance; it’s time to spur American jobs by leveling the fiscal policy playing field back in favor of the American worker.

Energy companies acquire resources and depletion is a mechanism to write off those resources in production. In technology spending, a company writes off the purchase with depreciation. With human resources, companies also write off salaries, payroll taxes and employee benefits. Therefore, depletion on human resources could be construed as double dipping. I argue there is a human resource value above the salary amount and that human resource can have a depletion allowance similar to oil and gas depletion allowances.

The mechanics: Figure the added value of a human resource job over a reasonable period of time and allow the employer to take an annual tax depletion deduction for the annual reduction of that human resource value. I am not suggesting that employers capitalize that value on balance sheets even though intellectual capital becomes structural capital (human capital), which does help businesses win. Google and Facebook have very few human jobs per revenues due to this added human resource value.

Further details can be worked out after Congress accepts the concept.

Robots can also contribute to Social Security and Medicare
Also, consider robots having to pay Social Security, Medicare, workers’ compensation and unemployment insurance. Consider this policy for virtual jobs, too. When a worker in India replaces a U.S.-based white-collar job for a U.S. employer, it would be helpful for the employer to continue paying payroll taxes.


Close