Dec 25 2013, 5:12am CST | by Forbes
It’s Christmas Eve and this year, as always, at my house, there’s a lot of anticipation. And by anticipation, I mean that the kids don’t want to go to sleep (I have a totally different idea). We’re tracking Santa’s progress via NORAD (North American Aerospace Defense Command, a United States and Canada bi-national organization charged with the missions of aerospace warning, aerospace control, and maritime warning for North America). If you’re curious, you can track Santa’s journey, too, via email to firstname.lastname@example.org or phone by calling 1-877-HI-NORAD or 1-877-446-6723. They’re also on twitter @NoradSanta.
As a result, we’ve had quite a few discussions in my household about how Santa manages, in one night, to get all of his work done. Clearly, he has help. And that has financial and tax consequences, right? So we had a little chat about Santa’s money and his tax bill. And here’s what we – a tax attorney and three kids – decided:
First, residency. Let’s go ahead and get this out of the way right now. My kids got letters from Santa again this year and they were postmarked North Pole, Alaska. So Santa clearly maintains his primary residence – and place of business – in the U.S. though we can’t be completely certain about his citizenship. There was zero additional discussion on this point.
Next, revenue. We’re not sure how Santa makes his money. My nine year has decided that Santa doesn’t need money since the elves make all of the toys (though the seven year old vehemently disagrees with this because he has seen toys also in the stores). As to how he pays for those associated expenses? He doesn’t have another job – my kids are very clear on this point – so we’re going on the theory that Santa is independently wealthy or has some additional forms of revenue (more on that later) because he must spend a lot.
Based on the numbers from 2012, there are 526,000,000 Christian kids under the age of 14 in the world who celebrate Christmas on December 25th. That works out to a delivery rate of almost 22 million kids an hour, every hour, on Christmas Eve (it’s worth noting that NORAD doesn’t make the distinction between Christian and non-Christian kids on Santa’s delivery route so they estimate many, many more deliveries).
In America (which, granted, is a bit more flush and commercial than many other countries), gifts per child are said to average $271 at Christmas. Assuming 526,000,000 children, that works out to $142,546,000,000 in fair market value of gifts.
Since Santa doesn’t sell the toys – he gifts them – his asset value dips considerably. He would not be subject to gift tax, however, since federal estate and gift tax laws allow taxpayers to gift $14,000 per person per year for 2013. That means that Santa can give away millions and millions of dollars worth of toys without federal gift tax consequences – so long as they’re to different kids. If Santa gives any child more than $14,000 in gifts (using the fair market value, since that’s what the IRS uses, elf-made or no), he would be subject to the federal gift tax and would need to file a form 709, federal gift tax return.
In exchange for making the toys, the elves are not paid in cash. My kids are convinced that Santa doesn’t pay the elves a wage for their work. Instead, he provides them with room and board and other perks. Even if he doesn’t pay cash – he pays expenses – that’s still considered compensation and it’s taxable to the elves. Fortunately, it’s also deductible to Santa.
Santa has, according to the nine year old, 500 elves. It’s a little more expensive to live in Alaska than the national average – about 34% more. The state median income for one person in Alaska is $54,272, according to the Department of Justice. I know that seems a bit high for an elf – but the work they do is quite important, right? So Santa clearly wouldn’t skimp. That works out to $27,136,000 in compensation for the 500 elves.
Compensation is taxed to the elves as income – but Santa has taxes to pay on their behalf. Payroll taxes – at the employer contribution rate of 7.65% – for the elves work out to $2,075,904 (remember that, for 2012, the elves get a 2% break on their share of payroll taxes).
Santa doesn’t pay income taxes on compensation paid to the elves but he does have to manage their withholding according to any forms W-4 provided to him. Fortunately for Santa, there is no withholding requirement for state taxes in Alaska. There is, however, an employer contribution to unemployment insurance (SUI). I can’t imagine that there are a lot of unemployed elves – so I’m guessing the rate is fairly low – but we’ll calculate those costs using the average rate of 4.11%. Applying that rate to the wage base for all of the elves results in $735,690 of employer contributions for SUI.
For 2013, Santa will have to report health care insurance costs paid by him for the elves on their form W-2. Fortunately for both Santa and the elves, there is no tax payable on those benefits. Other perks, however, may be taxable if they are not de minimis (meaning they are more than insignificant). For example, cell phones for the elves would be okay so long as there’s a business purpose – but tickets to reindeer games (the Super Bowl of the North Pole)? Probably not de minimis.
The kids are pretty sure – and I agree – that Santa doesn’t intend to operate as a for profit business. But he likely doesn’t meet the criteria to be tax exempt under section 501(c)(3) of the Internal Revenue Code. By default, that would make his venture for profit for purposes of IRS (whether he wants to make money or not) and therefore, taxable.
Even if Santa’s toy distribution scheme were to be classed as a non-profit, there may be other unrelated trade or business income… As noted earlier, my house isn’t sure where Santa gets his money. Clearly, he isn’t paid for his services though my kids question the value of cookies and milk left out for him (that is, as my six year old noted, a LOT of cookies). Since we’ve seen a lot of Santa merchandise in stores, we’ve worked out that we think he gets some licensing revenue for his own image and also for Rudolph – kind of like Pixar does for Lightning McQueen and Buzz Lightyear. That income would be taxable to the extent that it’s not offset with expenses. So, assuming all of this, what’s deductible?
For an expense related to business to be deductible, it needs to be both “ordinary” and “necessary.” No matter what the industry, toymaker or no, that is the standard that the IRS will use. An ordinary expense is one that is common and accepted in your industry. A necessary expense is one that is helpful and appropriate for your trade or business. You don’t have to prove that you couldn’t be in business without the expense – more or less, it needs to make good business sense. So what does that mean for Santa?/>/>/>/>
Well, clearly compensation and related costs (as noted above) would be deductible. Santa can also deduct the cost of goods and the cost of materials to make the toys. He can also deduct the costs associated with keeping the workshop going including heat and electricity – the kids have decided that the heating costs alone would be massive.
What about clothing/uniform costs? Those are deductible only if you must wear them as a condition of your employment and the clothes are not suitable for everyday wear. The rule doesn’t hinge on whether you would wear those outside of your employment but whether you could. After a chat with the kiddos, we’ve decided that Santa pretty reliably wears those red suits (in fact, the six year old is adamant that’s all that he wears – except at night for bed). I don’t think, under the circumstances, they’re deductible. The elves are another story: the six year old is sure that they wear special elf clothes to deliver gifts at the request of Santa – otherwise, they wear street clothes. If that’s the case, the elf uniforms would be deductible (note to Vera Wang: as with NFL cheerleader uniforms, you should totally get in on a piece of the action here… Vera Wang elf uniforms for 2013? I could see it).
We can’t forget about transportation. According to Abogo, it costs about $2,000 per reindeer per year to stay healthy; that’s $18,000 for reindeer related costs (that’s for Rudolph, as well as Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Donner and Blitzen – and not Dasher, Dancer, Prancer, Vixen, Comet, Cupid, Carter and Nixon, as my son thinks). Abogo also estimates that Santa spends $1,000 on sleigh maintenance per year and annual insurance premiums for the sleigh and reindeer at $42,000. All totaled, Santa will probably hit $60,000 in transportation costs. He can deduct the actual expenses but in his case, he’d be a lot better off using the mileage method. The IRS allowed 56.5 cents per mile for business use for 2013. At 75,500,000 miles (his estimated trip), he would be entitled to a generous $42,657,500 mileage deduction (though, let’s facing, he’s begging for an audit with those numbers).
And yes, Santa has a cell phone. The seven year old has informed me that Santa must have one because the teachers call him to report how good (or not) the kids have been. The nine year old also points out that he needs to keep in touch with the elves. I can’t imagine the number of minutes or roaming costs involved. Lucky for him, the costs of Santa’s cell service would be, we’ve decided, deductible as ordinary and necessary.
With all of those elves, Santa likely has a lot of health care costs. Lucky for Santa, the “Obamacare” employer mandate will be delayed until 2015. That means that Santa isn’t responsible for health care costs for its employees for another full year. So, for 2013, Santa didn’t have to worry about the penalty provisions. But come 2015, Santa will be subject to the requirement that all businesses with over 50 full-time equivalent (FTE) employees provide health insurance for their full-time employees, or pay a per month penalty.
We’ve also decided that Santa doesn’t attend any special classes or pursue any higher education – though he does offer toy making classes for the elves. If he pays for them (and we say he does), those would be deductible.
When all is said and done, Santa is probably doing okay. Thanks to Congress, in 2013, high-wage earners will owe an additional 0.9% on earned income above $250,000 for those who file as married filing jointly. Assuming that the Clauses stay married (I haven’t heard anything, have you?), the threshold will kick in at $250,000. That means Santa will pay the normal 1.45% Medicare tax on the first $250,000 of his wages and then then 2.35% (1.45% plus 0.9%) on wages over $250,000.
If Santa has been business savvy (and let’s face it, how could he not be?) for 2013, he likely has a bit of a nest egg. If so, the Medicare surtax on net investment income will kick in on his net investment income. This means that amount by which modified adjusted gross income (MAGI) exceeds those $250,000.
With all of these considerations, Santa might need a lawyer – for advising on taxes (of course) and to deal with any pesky lawsuits related to damage to roofs or harm caused by misfit toys. There’s also that matter of Grandma getting run over by a reindeer (allegedly). Legal expenses would be deductible to Santa so long as they’re related to the business.
In total, we’re pretty sure that Santa won’t pay any federal income taxes this year (just payroll, as noted). His deductions appear to far outweigh his revenue, at least according to our mostly very unscientific surmisings. That said, Santa, if you’re reading, two quick things:
As for everybody else, thank you for reading this year. Here’s wishing you and your family the merriest of holidays!
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Source: Forbes Business
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