- Personal Finance
With Apologies to Steve Martin: How to Make A Million Dollars and Not Pay Any Taxes
Do You Want to Know a Secret?
Once upon a time, Steve Martin had a comedy routine about knowing how you can "make a million dollars and not pay any taxes". Nice plan to hear - especially from a guy who had made many millions, just by making people laugh.
He would say:
Do you want to know how you can make a million dollars and not pay any taxes?
First....you make a million dollars.
Then...you don't pay any taxes!
It's that simple - you make a million dollars and then you don't pay any taxes. You see there? Pretty simple plan!
So you ask, what do you do then, if the tax man comes to yoru door and asks you, 'Why did you make a million dollars and not pay any taxes?' And do you know what you tell him?
That's it - 'I forgot.'
See, it's not that hard at all, you too can make a million dollars and not pay any taxes!
Thanks, Steve, that is some wonderful advice.
Now for a Reality Check
So, for a moment, let's say you take Steve's advice. Now what? Good question - what's the next thing the tax man is likely to say? "You have the right to remain silent...?"
That doesn't sound like the best scenario overall, does it. Steve's routine is great because it's utterly unrealistic - we all know what the outcome would be. Just ask Wesley Snipes. But wouldn't we love to be in that position and not have to pay any taxes? OK, so must of us would be glad to be in that position even if we do have to pay taxes. I get it.
But did you know that Steve's scenario wasn't far off track? Instead of telling the tax man, "I forgot," what if you told him, "this is a 501(c)(3) organization and the IRS has already determined that we don't have to pay any taxes?
That is a mouthful for sure, and may not entirely make sense to you. But it's probably worth considering a few more questions in order to understand enough about what this means to decide if you might be interested, don't you think?
So What's a 501(c)(3) and Why Do I Care?
A 501(c)(3) organization is an entity designated for special tax treatment under the Internal Revenue Code. Generally it is considered a tax exempt organization established for a charitable purpose, and for which donations to the organization are also tax deductible. So there is a double benefit - the organization itself is exempt from paying tax, and those who contribute money to the cause also receive a tax deduction for their gifts - very nice!
So there must be a trade off - and there is. There is no "equity" in the company in the traditional sense, so there is no big gain to be made when the organization does make millions, there are no dividends paid out to shareholders, etc. There is also the restraint on the organization that a board will place on what any manager can earn, since it is nonprofit and there is no profit motive for which to offer incentive pay.
When you consider all of these restraints, it may sound like it's not such a good deal after all. But don't be too hasty.
The organization itself can literally and truly make millions, and there are plenty of 501(c)(3)'s that do. This can be a bit confusing. How can an organization be "nonprofit" and make money at the same time? The answer lies in the system of fund accounting. It is an approved accounting process under Generally Accepted Accounting Principles, and there's no smoke or mirrors behind it.
It simply allocates what would be "profit" to a for profit company to a fund balance for the organization. In other words, the money made is never paid out in dividends or other types of shareholder payouts. Instead, the money made is meant to help perpetuate the mission of the organization in the future. But isn't that what most profits are meant to do, or actually do, in the most successful companies anyway? Of course, it is.
The other things earnings and profits do is compensate management for their efforts. But a 501(c)(3) is permitted to do this just as a for profit company is. It can pay salaries, wages, benefits and certain kinds of incentive compensation, generally at whatever level is determined to be reasonable by its Directors. And while the compensation is taxable for employees, there is no tax consequence to the organization itself, it pays no tax.
So it truly is possible to make millions without paying any taxes - healthy 501(c)(3) organizations do it every year.
If You Want to Consider This Option...
Here are some places to go and people to see for good counsel and services that will meet your needs:
RocketLawyer.com for additional legal forms and documents.
Andrew J Thompson is the founder of Elusen and an attorney with over 20 years experience advising nonprofit organizations, small business owners and entrepreneurs in creating and developing business models moving from grand ideas to great realities.