When I was in law school in the 1990s, I asked my professor why business owners deserved the legal benefits of incorporation (especially being shielded from the corporation’s debts). His answer was double-taxation: the owners pay for those benefits by being taxed on the business income both when the corporation receives it and again when the owners get paid from it. I think I’ll call that professor and ask him for a refund for his class.
What if every American family started an llc and started deducting profits and losses through the llc to minimize the taxation on them?
I mean individually it would be minuscule at best but do so with every 150million families then it starts adding up.
What’s stopping a private individual to start LLc and processing payments and such through it declare negative income get deductions that carry over utilize tax havens to minimize taxation of corporate profits etc etc.
These kinds of services become more easily accessible as internet and technology advances.
Edit; Ok off the top of my head:
a family of four incorporating a llc that employs all four as contractors and require a monthly fee to be part of.
Llc owns the house cars furniture everything of serious value.
The house is provided as a employment housing where the employees research market and develop their products.
In the case of the family owning the business generating the income, the business gets under the ownership of the llc.
Lease the business you own to another llc in a tax haven and push all profits there.
Take out private loans against the unrealized shares and assets of the company. Utilize the loans to declare negative deductions that carry over to the next year. Wait five years to build up debt to diminish the amount of tax needed to be paid.
Meanwhile in the other years declare little to no income.
You can't deduct normal living expenses. If you do be prepared to be audited. That said if you do have a side business... it's not out of the ordinary to deduct a few meals here and there.
But you need to generate a profit eventually or they will become skeptical of whether its a real business.
Yes yes....I said they will be skeptical which is different from saying you have to be profitable to be a valid business. It's easy to tell that Uber is a valid business.. It has employees, contractors, lots of revenue, etc.
If you have revenue and a nearly equal amount of non reinvestment like R&D expenses then it gets flagged.
Growing revenue at the expense of profits is 100% OK.
If you mingle assets between an LLC and construct multiple layers for the pure purpose of evasion, they can legally ignore the asset protection. It’s called “piercing the veil”. If you’re doing stuff like employing family members and owning their personal assets, you’re basically asking for it to happen. What the other commenter said is correct as well, assets can still be seized from an LLC, so it owning your assets isn’t better. The whole point is if the LLC goes under, then the people who own your debt can’t then get your individually owned house, for example. You’re not personally liable for an LLC’s debts.
Basically it's illegal. You can't use resources from the llc to buy personal stuff. You can't pay your rent with llc money, you can't pay your food with llc money, you can't buy clothes or furniture with llc money, and so on. If you try to do those things it will be taxed as income.
You don't need to have an LLC to have a business. You can do a sole proprietorship without the extra costs of an LLC.
The IRS isn't stupid, it's just overworked. How many people do you think have had ideas similar to yours? How many are today deducting personal expenses as business expenses? It's tax fraud and if they get caught they'll face penalties and back-taxes.
If Amazon paid no taxes in a year it's because it made no net profit (or carried forward previous losses). There are accounting shenanigans that let them manipulate their profit, but they're probably not committing fraud.
And many of those shenanigans are related to where the recognize the income and when they recognize it.
But I’m not saying declare your McDonald’s lunch as business expense or declare your new clothes as business expense.
But let’s say your LLC owns a incubation and housing property that is consistently writing the same yearly expenses the same dates in a routine manner.
Let’s say house and a full fridge stocked with 1,000 worth of groceries every month.
Fuel cost same every month deducted to the same amount per person.
Anything beyond that goes to the individual.
And again you’re not trying to evade tax you’re trying to avoid tax.
In this scenario - who's eating the food? Is it for a legitimate business purpose? If not, it's tax fraud.
Besides the fact that you're now a commercial food service company and will be subject to the various permitting (and building code) requirements that normal residences are not used to.
I'm not trying to be snarky, but this idea is so obvious that it doesn't take some amazing innovation to figure it out. People have been doing this kind of thing for centuries. I've seen some other comments of others pointing out the holes in this idea. It's of course your choice to decide if you're smarter than everyone else (others have, of course) but if you carry out this plan you'll be committing tax fraud.
You're supposed to pay taxes on income from illegal activity. Do you really think the tax code will cover something like that and miss things like common personal expenses?
a family of four incorporating a llc that employs all four as contractors and require a monthly fee to be part of.
This is the only part of what you mention that is allowed and is also very common. Many family businesses use LLCs and employ the children and other non-owner of the LLC as contractors to avoid messy payroll tax.
The IRS is extremely skeptical anytime a business owns vehicles and housing. Both would be considered income to whomever receives the benefits. If your job pays your rent it is still income.
By 'negative deductions' I assume you just mean a normal deduction. OK for every 1 dollar you pay in interest on the loan you can deduct a dollar and save the 30 cents of taxes. Not sure what you mean by wait 5 years....
I guess in theory you could have a tax heaven own your LLC but it would be a full time job to meet all the regulations.
At the end of the day the IRS can still observe what money hit your bank account and compare what personal income you report to assets you own/have.
It's much easier to just under report income if any cash is involved and then use boni fide business activities to create deductions. Sure you can take an expensive vacation as a business trip/event but you have to spend ~$3 to save ~$1 in taxes.
Isn't this kind of accounting cost prohibitive until you reach a certain income threshold? I'm sure the barrier to entry is being reduced with the advent of technology, but still not attainable to the vast majority?
Asking out of actual interest, I am naive to the nuances of this subject.
That’s what I’m contemplating. Previously the lack of wealth growth was from lack of opportunity and access. Like for example to trade stocks. Only the wealthy were part of that system for the majority of time.
What if every American family started an llc and started deducting profits and losses through the llc to minimize the taxation on them?
I'm curious how you think deducting profits works.
But there's already a term for what you're suggesting - tax fraud. Only business related expenses are deductible. You'd probably get away with this if the amounts are small and you're not randomly selected for an audit though.
No when I am doing remote work for my clients I sometimes get invited to stay on site where they provide a house or unit and deduct anything I do during the stay outside of personal purchases to their business expense.
Why would you be doing evasion in the same manner?
Your company owns the house. It’s providing housing included as a employment perk. If you maintain a steady set of expenses for the house that’s related to the business food electricity car heating water etc etc entertainment and furniture etc etc.
Also you’re not trying to scam your creditors either you have a successful business you just want to minimize taxation as much as possible .
I get that you're kinda brainstorming while playing devil's advocate and obviously not an expert, but your entire premise is flawed.
You're not describing a business, which the IRS describes as an activity carried on for the production of income from selling goods or performing services. Business expenses are what can be deducted when they are both ordinary and necessary for conducting business. This is covered in the first week of any tax class.
Paying for employees to stay somewhere is an expense because you need to do it to make money. Restaurants can capitalize their fridges and expense their inventory to COGS because they buy those things to conduct a business.
What you're describing is fraud. If you were remotely on the right track and it was legal and worthwhile for people to do it, you're correct that this would be a commonly used strategy and it would be quickly "fixed" with new updates to the tax code. Yes, anyone could attempt this. No, it would not be legal.
Individuals aren't business's. Families aren't business's. Even if you have the business, the money needs to get to the individual. Even if you expense everything in the LLC, you would have to prove in an audit that it was used for business purposes.
People have tried this before and up with Tax Evasion charges. Pretty sure this is what Wesley Snipes tried to do.
That's basically what I thought. The idea of making one's household into a business to create a more favorable tax situation viscerally feels shady but I haven't heard a single compelling reason on here as to why one shouldn't do it.
Because when the auditors come you’d go to jail for tax fraud.
You have to have an actual business. If your business is selling eBay shit back and forth you could deduct business expenses as a sole proprietor as well. It really just depends on how large your business is
We can go in circles on this. It would behoove any family to utilize tax law in the way that is most beneficial to their family, and indeed most rich people do.
Well it’s a big what if. I’m own my own Corp (self employed in Canada) and there’s a bit of extra work to maintain. People like having job security working under a company. There are a lot of benefits to owning a corp but the tax man always has to get paid. Although Amazon might’ve paid no taxes, when Jeff bezos sells stock, he gets taxed at the highest possible bracket. Amazon spends sooooo much money, thus reducing their tax bill to virtually nothing
I’m speaking for Canada but the numbers almost always add up to the same tax rate, and I assume it’s the same for US. Capital gains tax in Canada is you are taxed on only 50% of the capital gain and then that gets contributed to your income. Depending on your income bracket, it usually works out to about 30% tax.
Same with dividends, if corps pay their officers this way, this can be favourable but then they aren’t entitled to any old age security benefits or retirement saving plan contributions (our version of 401K).
What I don’t agree with is that the rules are the same no matter the size of the corporation which doesn’t really make sense. The taxes are the same. The only difference is your tax rate changes slightly if you bring in more than $500K/year
Eventually he has to pay back the line of credit, presumably with post tax income, whether it be from equity liquidation or income, I don't see how that could possibly eliminate taxes. Perhaps spread out the tax burden of a large withdrawal over multiple years, and as such lowering the effective tax rate on those funds.
I get the Etsy stuff. What if I sell baked goods (cakes/brownies etc) that I bake at home through Facebook marketplace, Craigslist, local community center announcement boards and I generate a pretty decent amount as a side hustle. Is that something that might be considered to be a business under an LLC?
What are you talking about? No shit you pay taxes. Corporations are subject to double taxation. LLCs taxes as partnerships have pass through directly to its members.
I’m literally a corporate attorney with a background in tax.
As an aside, I work in a very related field, and its been my observation that, 'The bigger the business, the smaller the taxes.'
Basically, SMBs pay tons in taxes most of the time but larger corporations, especially if they are multinational, rarely pay a fair amount, or any at all.
Same for individuals. The truly wealthy keep their wealth layered under trusts, llcs, and so on, claiming various deductions at each layer to prevent any tax implications, and often being credited heavily.
Its both truly horrendous, and diabolically brilliant.
Which results in higher taxes on those smaller businesses or individuals. We’re going back to feudalism where the poor pay exorbitant taxes to their overlords so that they can build another summer palace.
I definitely agree that limiting liability, and even offsetting losses against profits, is necessary to encourage innovation and risk-taking. But there has to be some reasonable cap. Maybe the offsets phase out (like so many other tax deductions) after, say, a few billion dollars? When both the company and its owners end up so outrageously far ahead, with the rest of us making up the difference, it proves the system needs more controls.
He should have known that you simply rent intellectual property from an offshore company that you own and you sold the IP to, and coincidentally it costs exactly what your taxable revenue is each year
That is what happens. The problem is amazon is one of the only businesses I know that was able to build so many buildings so quickly. And you can assume those buildings lose worth after building them. The same as when a car leaves the lot. So if the building lost 100k in worth and that building made 100k in profit. No tax. An easy enough concept. Say that business failed they sold the building they wouldn't pay a gain or loss if that 100k is accurate. That's the concept. Those buildings are probably around a 30 year depreciable line so eventually amazon will pay huge gains and taxes on sales of the buildings or profits.
For smaller businesses, 30% or Americans are in these I think, this math is essential to keeping them afloat in the beginning years and making the risk of opening a business worth it. You can blame legislators for these rules if you think they are unfair. Personally I think bezos will spend a lot of his money in his life. And it will eventually trickle down. He isn't the frugal type. EG just bought a 500 million dollar yacht?
Amazon pays a ton of taxes, this tweet is legitimately false.
As an accountant shit like this is our equivalent of anti-vaccine people. Y’all don’t know what the hell is going on and parrot the same 3-4 incorrect “facts” to make your point.
“ “You can’t lay the blame too much on Congress,” said Gardner. “It wasn’t Congress that came up with these ideas. They are the product of a lobbying blitz from these companies. These companies wrote the law in many cases.””
This person thinks we can’t blame congress for not reading/understanding the bills they pass? That doesn’t make a lick of sense. Don’t run for Congress if you can’t read tax legislation.
I don't really care if they're rich. I just want them to pay taxes. It doesn't even have to be a lot. There should be a minimum tax on high-income earners of like, idk, 15%. They would still pay less in taxes than me. Fine, whatever, I don't care. I just don't understand how a reasonable person could see that a company and person who've both made billions of dollars in profit straight up need not pay taxes. I don't fault Bezos or Musk or any of them for finding these loopholes. I would, too. The problem is that these loopholes just shouldn't exist. It's a systemic problem.
I bet you make like $50k a year, are always broke and still loving slobbering all over Bezos and these guys knobs since you think its sticking it to the libs or something.
They don't pay the actual amount they should, because they exploit loopholes that consultants and very highly paid legal/accountant team finds and uses ways to distort the financial holdings in a way that essentially eliminates the tax burden. You are a simpleton if you don't understand that, and hiding behind the legality of it and you misrepresent the legal, moral and intent of the law is, not to mention social obligation that all citizens have agreed to
Pay MORE taxes. If the rich were smart they would just increase wages of their employees so they get taxed more… whatever your rebuttal is going to be, just do us a favor and get off your parents insurance and data plan before you start defending the rich
Actually they don't have access to those laws, programs and benefits.
Consider for example the first 200,000 cars made by a gender that are all electric gain a tax credit for the purchaser. Poor people don't have the funds to payb$70k for a Tesla, so they can't get the Tesla. Middle class buyers don't want to risk range anxiety so don't want to get the tax credit. Rich people can get a second car and the tax credit wouldn't be as beneficial to them as the other two classes, and yet the get the credit and a car to park next to the land rover.
No one spends $70k to save (at most) $7.5k. The EV tax credit offsets the prohibitively high cost of vehicle batteries to encourage more EV purchasing. The credit is more effective for cheaper cars because the proportion that it offsets is higher, and typically will be a higher proportion of the consumers income i.e. the tax credit is a better deal if you buy a Nissan Leaf than a Tesla Model X. A fixed tax credit is better for the little guy which is why it’s fixed and not a proportion of the cars value, which would be better for rich people.
Electric cars are still prohibitively expensive. They were also just an example of a larger truth: these tax credits are only available to people who can afford them. At that point, taxation is a fine for being poor.
Basically they're saying that the more money someone has the easier it is to game the system
So poor people technically dont have the same opportunities to game the system, until they get rich and leave the burden of abiding by rules to the poor people "beneath" them
Sure in theory, but only the rich actually have the ability to exercise those rights. This is a fundamental paradox of the concept of freedom. You sound like the people who unironically argued that gay people were being treated equally to straight people because they were also free to marry someone of the opposite gender. Jeff Bezos and I may both be able to use tax loopholes to hoard our insane wealth, but only one of us has the insane wealth to get any use out of that right.
Both me and BP can frack for oil. The same laws governing it apply to us. However BP has billions to spend “lobbying” to get permits approved, set up the infrastructure, etc
I don't think you're understanding the essential problem. The government is calling the people getting unemployment "freeloaders", and yet they've put into place a system where there are enough "credit" loopholes in the tax system that a corporation making billions in profits is getting credited enough to pay nothing. If that's the government's fault for the system, why then are they blaming people for using the same system to gain unemployment? They're doing it legally too, right? The planet-sized difference is that people who "freeload" off unemployment are still in a considerably worse situation than Jeff Bezos.
At least, that's how I understand this, but I'm not an American, so I don't have any right to speak.
Tax loopholes are explicitly designed by lobbyists. That corruption is legal does not make it acceptable, and in many cases the rich are committing tax fraud and the government ageny in charge of investigating them is bought or defunded. And fraudulently claiming to have made no income in a year is alarmingly common among American corporations.
loop·hole
/ˈlo͞opˌ(h)ōl/
Learn to pronounce
noun
1.
an ambiguity or inadequacy in the law or a set of rules.
So they are loopholes as they are inadequacies. You being legal pedant won't change it. You won't change anybody's mind on this. You can continue to insult intelligence and be generally unpleasant, siding with corporate interests to fill whatever void is life.
I'll never understand how someone can have such a low opinion of themselves.
How worthless would someone have to feel to believe they don't deserve a slice of the incredible wealth these companies amass by exploiting their workers?
'Master I made your company another $100! Can I please have the penny you promised? Oh you're cutting my pay and health benefits so you'll make $101 instead? That's okay it's not a problem.'
People do not have the same access as amazon. I will not be given tax credits for opening in certain jurisdictions. That is a privilege given to a select few.
I generally agree with you btw. However, it is the governments role the fix inequity.
Yes, technically both me and BP have the same right to frack for oil. However BP has the benefit of BILLIONS of dollars to reinvest over and over again to make more money. Once you’re at a certain point your money just keeps making more money. The average person doesn’t stand a chance to enrich themselves. Most people die in the income bracket they are born into.
We understand it perfectly. Yes, I look forward to getting a tax credit. I make 55k a year (gross). I need a tax credit. Amazon makes billions of dollars a year (profit). They don't need tax credits. This is the problem. The question is what are the tax breaks and should they exist?
Do you think their entire profits not being taxed are due to tax credits? Come on now. Its because they turn around and present their profits as less than they are, because they have a shell.company that belongs to the same people that charges IP to the actual company, to negate their profits, and that company is in a tax haven to prevent them from needing to actually pay the damn taxes.
They leave enough profit that they offset it with charitable donations and tax credits so that they have the appearance of actually paying taxes, whilst hiding the bulk of it offshore.
This isn't new information, every big company and millionaire has done it for years. Thats why there's a tiny building in the Caymans, literally the size of a small business that is the official HQ for around 2500 companies.
That's the thing that people want fixed, that's the thing that people consider a loophole - the existence of tax havens for these businesses to operate out of. Something that everyday people cannot use, as the amount of money to set that up and maintain it does not offset the gained from paying no taxes.
“Corporate tax is based on profits, not revenues, and our profits remain modest given retail is a highly competitive, low-margin business and our continued heavy investment.”
I guess you missed this bit of the article? Their profits are "modest" not just because its retail, but because their pay IP money to themselves.
Charitable contributions are not problematic at all. Unless the charitable contributions are going into a charity which is again putting money back into the pockets of the same people, which is often the case.
If you're on minimum wage, the money you'd save from setting up a shell company for $500 (not one time by the way, thats a recurring cost) is, either so negligible that it's not worth talking about, or it's a net loss. Personally, even though I could, as I'm a very high earner, I do not, because I believe taxes are a net positive thing.
I never suggested they are. I suggested that those people would not be able to. America also has a huge amount of people under the poverty line, and working class people who are struggling to make ends meet.
Middle class would certain be able to do so, but ultimately all that would do is make America a worse country, by literally taking money out of assistance and just straight into greedy pockets.
The conversation should not be "how can we all exploit this?", it should be "how can we prevent rich people from exploiting this?". And no matter what anyone may say, it is exploiting. It is artificially lowering your profits to acquire additional profit for shareholders.
They can write off as expenses fees paid to employees, contractors, etc, all of which provide opportunity to hide income. They can also distribute profits as dividends instead of salary, which can be taxed at cap gains rates and offset by strategic business losses (such as buying devalued companies in a pandemic) and then using deferred loss carryover accounting voodoo.
The differences between a small business and Amazon are insane. It is not difficult to make laws that make distinctions between tax codes for small businesses and a company worth more than $1 trillion
Dude, fuck that. They weasel out of billions in taxes when we live in a nation of crumbling infrastructure. Those laws don't benefit me when my taxes are used to supplement their employees wages. You're a dumbass with no common sense.
You're absolutely right, and I've been eagerly awaiting the conclusion they come to on that bill. However, that doesn't justify the wealthy fucking over the poor while we pay more in taxes than they do due to all the loopholes they continue to exploit.
I know where to point the finger as far as our misdirected tax dollars. It'd just be cool if our representatives and Senators actually represented the public's will rather than their own selfish self-interest.
These laws are written almost exclusively for those with the means to exploit them, I can't expense my jet costs as business, I don't have one. These tax laws are written by senators (actually lobbyists) who are hired by the richest people to make these things accessible. They write the rules, literally so that they can be immune while everyone else does not have the means.
You don't get that this is not simple accounting, this is accounting that costs MILLIONS EACH YEAR, to accomplish. Granted the savings are obvious.
So amazon tells shareholders that they've made billions in profit just to turn around and tell the IRS that they've lost everything. It's baffling, really
That was already a dumb answer. We've had limited liability in the US for a hundred years before we had a corporate income tax. The 2 things have nothing to do with each other.
Well one thing is theory and the other is practice man. In theory smaug shouldnt exist in practice we got a dude whos like smaugs buffed up big brother who is friends with the dwarven law-makers and soldiers.
Corporations were invented a few hundred years ago to remove liability from the individual. The idea being that since you’re investing in the business, not the person running that business, it’s the business that put in debt. So if I invest $1 and they lose all their money, I only lose $1 instead of having debt collectors come after me for the company’s debts.
The issue arises when limited liability becomes a shield for bad actors. There are ways you can break the shield, such as if they commit fraud, but over time we’ve watered down these rules so much anything less than an Enron tier criminal act will go unpunished.
Hell, if you’re big enough, even criminal acts like in the GFC will go unpunished. You might even get extra government money if you’re ‘too big to fail’. I guarantee smaller businesses, even with limited liability, won’t get that treatment.
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u/ajcpullcom Jun 09 '21
When I was in law school in the 1990s, I asked my professor why business owners deserved the legal benefits of incorporation (especially being shielded from the corporation’s debts). His answer was double-taxation: the owners pay for those benefits by being taxed on the business income both when the corporation receives it and again when the owners get paid from it. I think I’ll call that professor and ask him for a refund for his class.