Mining the Tax Code

Today's the Day After (taxes are due), which means I'm coming back up for air after 72 hours in the accounting tank.

Beginning Sunday noon, I took over the dining room table, skipped meals, socialized with no one, and spoke only to request help in tracking down obscure details about financial exchanges that took place months ago for which our records are ambiguous. It's an unusual art form.

Yesteray I put the last envelope in the mail just minutes before the postman collected everything, once again (barely) navigating the IRS' annual version of Beat the Clock. I was really happy to lay aside spreadsheets last evening for my weekly dose of duplicate bridge, where my biggest challenge was bringing home a 5 hearts contract doubled, missing the ace and king of trump.

As an intentional community, one of Sandhill's aspirations is to be an example of a saner life. That means trying to create a model that others could reasonably emulate (should we be sufficiently inspiring). That, in turn, means operating legally, rather than trying to live outside of government regulations—even ones we disagree with—hoping to escape notice by flying below the radar.

Among other things, that means minding of the tax code. At Sandhill, our thinking about taxes breaks into two parts: a) state & local, and b) federal. We feel fine about paying state and local taxes. These mainly go to support roads and local amenities like schools, libraries, and hospitals. These are services we use (or at least like having in place) and feel it's appropriate to pay our fair share.

With federal taxes we have a different analysis. We tend to be highly critical of what the US government does with its budget, and prefer to minimize our contribution to the US war machine. But what are our legal options?

Two months ago (Feb 5-22) I authored a series of blogs about the economic leveraging possible through community living. One thing I left out of that cataloging was the tax advantages peculiar to income-sharing communities. When the tax code was overhualed in 1954, lawmakers established the relatively obscure tax-exempt category of 501(d), austensibly for religious and apostolic orders which pooled their income. (To give you an idea of just how obscure this designation is, when we applied for it in 1979 there was no application form. Think about that. A category so small that even career bureaucrats could not justify assigning someone the task of creating a form for it.)

While income-sharing communities may or may not have a common spiritual belief, we are all organized economically just like monastic orders, and we've been able to make the case with IRS that we should be treated the same way. The key benefits of this are two-fold. First, although we are organized as a corporation, we file a partnership return (Form 1065 if you're keeping score at home), and the corporation has no tax liability itself. All net profits are reported on participating members 1040s, distributed according how long they were members of the community during the tax year—not according to how much money they made individually.
This is enormously beneficial in that the community can have members who earn a lot of money and others whose contributions are solely domestic, without worrying about the tax bite on the high wage earners. Since we actually aggregate all the money to cover everyone's needs—just like in a monastery—the IRS has agreed to treat us collectively, which was the point of 501(d).

In Sandhill's case, we had two members who earned more than $20,000 last year doing part-time professional work, yet their pro-rata share of Sandhill's income was less than $7000, resulting in their owing no income tax. (The other factor that allows us to keep our income so low is that our high degree of sharing means we need far fewer dollars to have a high quality life. There's a good bit more about this in my aforementioned Feb series.)

Second, each individual's pro-rata share of Sandhill's net profits is reported as dividend income, and is therefore not subject to self-employment tax. In exchange for foregoing access to Social Security payments in the future (or the possibility of access to Earned Income Credit), we can keep all the money (Social Security currently takes a healthy 15.3% bite) and take care of ourselves. Both because we don't have confidence in the future of Social Security, and because we're nervous about how the federal government uses dollars, that's an easy bargain for us to make.

While there was a steep learning curve in the early years figuring out how to set up our accounting so that we'd have the figures we needed every April without conducting heroic manipulations, we've solved that problem years ago. And that's the story of how we've been able to go beyond our commitment to mind of the tax code, to being able to mine the tax code.

What would the federal government do if everyone lived like Sandhill and it couldn't afford a new air craft carrier? Be nice to find out, wouldn't it?