Alert: Tax wonkery ahead, but it's a BFD, especially when it exposes tax cheating by a man who wants to be the next Senator for the state of Alaska. It's not news to hear that sole owners of corporations shift money around to minimize taxes. 99%
October 19, 2010

Alert: Tax wonkery ahead, but it's a BFD, especially when it exposes tax cheating by a man who wants to be the next Senator for the state of Alaska.

It's not news to hear that sole owners of corporations shift money around to minimize taxes. 99% of the time they do it in a legal fashion, and are in compliance with IRS regulations. There's nothing even morally wrong with that -- it's fair to use the tax rules to minimize tax liability, as long as one plays by the rules.

In tax land, there are two basic kinds of income: passive and active. Passive income comes from investments primarily in the form of interest, dividends, and rents. Active income is "earned"; that is, one works and is paid. Active income received by a sole owner of a corporation is subject to Social Security taxes; passive income is not.

According to Bonsai66 at Daily Kos, Joe Miller has been shifting his active income over to the passive column by overcharging himself for rent on office space he owns. In his financial disclosures filed recently, he lists his office as an asset, for which his law practice pays rent. That's fine and well. It basically shifts pockets but here's the kicker: The rent has to be reasonable and based on market prices for similar properties.

Miller reports the value of his office between $50-$100,000 on his disclosure. He also reports rental income on it of $50-$100K. He reports earned income from the law practice of $59,000 or so. The property is valued at $25,000, which means:

  1. Joe Miller's LLC is paying Joe Miller 2-4 times the fair market value of the property in rent on an annual basis;
  2. Joe Miller is reducing his earned income by excessive rent payments;
  3. Joe Miller is intentionally underreporting his earned income to reduce the amounts he must pay in income tax and in FICA/FUTA payments to the federal government.

For any expense to be deductible, it must represent an amount which is 'reasonable and customary'. Clearly rent payments which exceed fair market value by a factor of at least 2 are not reasonable, nor are they customary. On a 703-square foot office, that translates to nearly $3/square foot at the low end, and $6 on the high end! A quick survey of Craigslist listings for office leases in that area shows that to be far greater than similar lease rates.

Joe Miller is intentionally overstating his passive income to dodge what he rightfully owes in Social Security taxes. It may be a Tea Party value, but it's also illegal, and should be investigated by the IRS as soon as possible.

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