If you’re facing higher taxes for 2013, consider the situation of a certain Mr. Santa Claus. Forbes contributor Kelly Phillips Erb analyzed Santa’s business operations recently, and through that, we at LNWM spotted a potential problem for Mr. Claus.
Drawing on her kids’ ideas about Santa’s business, Kelly comes up with these major conclusions:
- Cost of toys and other presents: $140 billion
- Cost of elves’ food and lodging: $27 million
- Elves’ payroll taxes: $2 million
- State unemployment insurance contributions for the elves: $735,000 (Alaska).
Obviously, Santa is not going to making a profit in 2013. And he never has.
The good thing, Kelly points out, is that Santa doesn’t have to worry about gift taxes. He can give up to $14,000 to each one of the millions of Santa believers worldwide.
Neither Non-Profit nor For-Profit
But there’s a catch, according to Kristi Mathisen, Managing Director of Tax and Financial Planning at LNWM. As Kelly mentions, Santa most likely does not meet the criteria to be tax-exempt under Section 501(3)(c) of the Internal Revenue Code. But neither can Santa be considered a for-profit enterprise, says Kristi, which would allow him to claim all those losses against other current or future income.
Even though Santa is losing money big time, Kristi notes, he can’t just deduct net toy-business losses against current or future income. Why? Because to do that, he must have made a profit in three of the past five years. Or he must pass the “facts and circumstances” test to prove that he’s engaged in a for-profit enterprise, which he probably can’t do.
So Kristi thinks Santa’s whole operation is probably going to be declared a hobby by the IRS. And it’s going to be subject to the hobby loss limitations. For 2013, for example, the most Santa can claim as net hobby losses is zero, even though his expenses are just under $140 billion. Ouch!
But Santa has an even bigger potential problem, says Kristi. He would still owe taxes on the two sources of income Kelly and her family think he has: income from licensing his and Rudolph’s image – plus the income from his accumulated wealth over the centuries.
So if you think your tax situation is annoying, consider Santa: Just under $140 billion in losses for 2013, and he still owes taxes.