Tax Strategies for Somali Pirates

Ahoy, matey!

Today’s rough economy has cost the country millions of jobs. At the same time, news reports that Somali pirates have raked in seven- and eight-figure ransoms have many laid-off Wall Streeters contemplating a more traditional form of piracy. Here’s what you’ll need to know about taxes before you join the Somalis for a life of adventure:

• U.S. citizens are taxed on all income from whatever sources derived. This includes income from illegal activities, even if those activities are conducted abroad.

Cash ransoms are taxable as ordinary income. Noncash “treasure” and “booty” are taxed at fair market value. This is true even if the cash proceeds you generate from “fencing” ultimately total less than that initial fair market value.

If you pay foreign income tax on your booty, you may qualify for the Foreign Earned Income Exclusion.

Business Expenses

• Ships and other equipment you buy to conduct raids are capital assets. You’ll depreciate these over the applicable period. (Guns, grappling hooks, outboard motors for inflatable craft, and similar items may qualify for first-year expensing.)

If the Indian Navy or other coastal defense fleets destroy your ship, you can deduct the remaining basis as a capital loss (subject to the 10% floor on adjusted gross income).                                                                     

Unfortunately, there’s no deduction for the cost of illegal expenses. This is a gray area, but we suggest you treat the cost of surplus Kalashnikovs, ammunition, and similar items as nondeductible expenses — just to be safe!

If you start feeling guilty about the ransom amounts you collect, relax! Most shippers carry insurance for such expenses — which, of course, they pay for with deductible dollars. And most of those policies are written with international giant AIG, which has received over $160 billion in government bailouts. So ultimately, it’s all your tax dollar anyway!

Meals and entertainment are ordinarily just 50% deductible. But — you can deduct 100% of the cost of meals that you furnish employees (and yourself, unless you’re taxed as a proprietor) for the convenience of the business and not for compensation. These include meals you furnish on-premises to let employees stay available for emergency calls, meals you furnish during short lunch periods (up to 45 minutes), meals you furnish where there aren’t adequate eating places near the workplace, and any meals you furnish to over 50% of employees. You can also deduct off-premises meals you provide as part of required business meetings (i.e., meals you serve onboard commandeered vessels).

Finally, remember that while piracy may be lucrative, it's still illegal. Be aware that while reporting your income protects you from bootlegger Al Capone’s fate, you may still be subject to federal and international regulatory and criminal sanctions.

Be sure you call us to help you make smart choices before you launch any business venture.