thene: PROTIP do not fuck with Minette (minette)
thene ([personal profile] thene) wrote2014-02-09 09:32 pm

1% Tax Entitlement, Part 1

So, there's this guy. We'll call him Asshole.

Asshole worked for a well-known private equity firm. In addition to the wages he received for working there, he was also a partner in two of the firm's investment partnerships, and received pass-through income from these partnerships (more on this later). Asshole quit his job last summer and started an MBA course.

Asshole earns too much to qualify for any of the education tax credits; those credits are awarded to low or middle-income people who put themselves, or their children, through education programs in order to have better lives in the future, and therefore they phase out at something like $100,000 of income /too lazy to look it up. However, Asshole is undeterred. He's going to deduct all his MBA tuition as an unreimbursed employee expense.

Is this legal? Well, that depends. This is what the code says you can deduct:

If the education--

(1) Maintains or improves skills required by the individual in his employment or other trade or business, or

(2) Meets the express requirements of the individual's employer, or the requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.


There's certainly types of education that qualify. A few days ago, I deducted a young City of Boston teacher's tuition as an employee expense because it was the best option available to her and her employer (the school system) requires that she get a Master's degree within 5 years in order to keep her job. But MBAs? This has been the subject of multiple court cases, and a lot depends on circumstance, such as whether or not you can prove you were established in a trade or business before quitting your job to do an MBA.

So Asshole presents Mr Slime with a 1098-T that states the total amount he paid to Swank Business School. Foolishly, he also hands over his student account transcript and I notice that almost everything on it is not tuition - no, Asshole, you cannot deduct your health insurance as an employee expense just because you paid it via the school, much less your fucking cable bill what the hell. So I let him deduct the part that was actually tuition paid in 2013 and move on to his partnership income statements.

(Why do private equity funds and venture capital funds operate as partnerships? Because partnerships are not like corporations. With corporations, if you buy stock that costs an amount of money equal to 5% of the company's value, you own 5% of the company, and while there are different classes of stock and yours may not confer voting rights etc, you are gonna get your 5% share of the company's dividends. Partnerships, however, can be rigged however you want. Typically, the people who set up a PE or VC fund put down just slightly over $0.00 and are entitled to 20% of the fund's profits. This is why they are so good at wasting money on shitty things that fail - it's not their money, it's other people's money.)

Partnerships do not pay taxes. (Neither do most small corporations, termed S-Corps). Instead, they pass their income through to the partners, and each partner reports their allocated share of the partnership's profits on their own individual tax returns. The partnership income statements that Asshole turned in each contained a boilerplate statement that the partnership existed to passively make investments on behalf of its members, and that all of each fund's income was therefore investment income (taxed at a top rate of 20%) rather than ordinary income derived from work (taxed at a top rate of 39.6%). Such protestations have, recently, been the source of unending but unproductive wank as they are one of the major reasons that Mitt Romney pays less taxes than you. The PE fund is pretending it does...nothing! It does not manage companies, it does not provide any work in order to generate its income. It just sits back and money just magically happens, like. (Again, this can be completely legit - eg. real estate partnerships that collect rent while only occasionally having to lift a finger to repair something or find a new tenant, or partnerships that make long-term stock investments and don't do much trading).

You see how this applies to Asshole?

Yes, Asshole just made a deduction to his income of almost $20,000 of college tuition in order to 'Maintain or improve skills required by the individual in his employment' which his employers, and he, are simultaneously claiming is not even a real job.

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