How US companies can avoid paying taxes (video)(video.nytimes.com)
video.nytimes.com
How US companies can avoid paying taxes (video)
http://video.nytimes.com/video/2011/06/19/business/100000000870844/inside-the-accountants-playbook.html
4 comments
They single out the drug companies in this video, but really it's C corporations as a whole that can game the system. And the system is designed to be gamed. The US tax code is a rabbit's warren of incentives that accountants and tax lawyers get paid well to navigate. Meanwhile, most S corps and LLC's, with their pass through tax structures, bear the full load.
Video is only 3m35s long and I thought it was worth a watch.
Nothing shocking or new, but the video does a good job of tying all the steps together for how (drug) corporations can reduce their tax load.
Nothing shocking or new, but the video does a good job of tying all the steps together for how (drug) corporations can reduce their tax load.
The key word being "(drug) corporations" since they are large enough to afford this.
This is beyond the reach of your average small company / startup. 'Little people' do pay quite close to the 35%.
This is beyond the reach of your average small company / startup. 'Little people' do pay quite close to the 35%.
Do the little people pay that? Or do they take all revenue as salary and zero out the profit? Which is what I assume every small business does.
With income taxes, self-employment tax, state business & income taxes and 3 kinds of local business taxes, I'm losing more than 35% of every dollar and I'm not even making enough to reach the higher tax brackets.
About "little people" in general, "little people" don't form C-corps, they trade under their own name (sole proprietorship), a DBA (sole proprietorship), or as a pass-through LLC or S-corp. There's no distinction between a company's income and your own, so you don't get to decide what is salary and what is profit, they're one and the same on the tax return.
About "little people" in general, "little people" don't form C-corps, they trade under their own name (sole proprietorship), a DBA (sole proprietorship), or as a pass-through LLC or S-corp. There's no distinction between a company's income and your own, so you don't get to decide what is salary and what is profit, they're one and the same on the tax return.
After you make about 375k, you have to pay 35% tax on every extra dollar of salary too.
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Source?
The IRS, that's the top income tax bracket. They're listed in the form 1040 instructions if you want to see it on paper.
Actually, I was referring to the assertion that you're in the 35% tax bracket when your salary hits ~375K. There is a lot of confusion in this area, especially when things like pass-through entities (like LLCs and S-Corps) are involved.
Keep in mind that salary income from an LLC or from an S-Corp is also taxed by Soc. Security and Medicare (the dreaded ~15% self-employment tax) while capital gains from an LLC/S-Corp isn't necessarily subject to it.
My point (and I do have one) is that the tax picture is considerably murkier when there is a business involved, be it a small one or a large one. Income taxes for salaried workers are a relatively straightforward matter. Income taxes for owners of businesses are another thing entirely. Deductions for business expenses are just a small part of that circus. The rules for businesses are a BIG part of the tax code and responsible for much of the shenanigans. If you think paying $250 for H&R block to prepare your return is steep, try paying something like $15-$30K for a moderately complex return for an LLC.
(NOTE: My next-door neighbor just retired from the IRS after 30 years doing small business audits and my ex-fiance is a tax accountant. I've also owned and filed taxes for S-corps and LLCs as a principal. Shit just got real.)
Keep in mind that salary income from an LLC or from an S-Corp is also taxed by Soc. Security and Medicare (the dreaded ~15% self-employment tax) while capital gains from an LLC/S-Corp isn't necessarily subject to it.
My point (and I do have one) is that the tax picture is considerably murkier when there is a business involved, be it a small one or a large one. Income taxes for salaried workers are a relatively straightforward matter. Income taxes for owners of businesses are another thing entirely. Deductions for business expenses are just a small part of that circus. The rules for businesses are a BIG part of the tax code and responsible for much of the shenanigans. If you think paying $250 for H&R block to prepare your return is steep, try paying something like $15-$30K for a moderately complex return for an LLC.
(NOTE: My next-door neighbor just retired from the IRS after 30 years doing small business audits and my ex-fiance is a tax accountant. I've also owned and filed taxes for S-corps and LLCs as a principal. Shit just got real.)
I pay my accountant $275 to do the returns for my LLC. I keep my own books the rest of the year. I've been audited by the IRS and owed no money after the audit. Having a business doesn't automatically make things super complex. It's only complicated if your business is complicated.
Do you have employees? How about lots of capital assets with varying depreciation schedules? Do you operate in a business that gets different tax treatment for operating in a special zone? Do you get income from many states?
Your situation isn't typical. In fact, it's probably an outlier. I know performers who have to file 43 different state tax returns.
Your situation isn't typical. In fact, it's probably an outlier. I know performers who have to file 43 different state tax returns.
> Even though the American corporate tax rate is 35%, nobody pays that.
Is she saying no corporation pays that or just drug corporations?
Is she saying no corporation pays that or just drug corporations?
Another reason why income taxes are silly.
Downvote? Do you enjoy bearing the burden?
Downvote? Do you enjoy bearing the burden?
While my car currently needs to be repaired, I don't go around saying that cars are silly. The US tax code is a broken mess, but that is just an implementation problem.
With all due respect, that's akin to saying my car would be a plane if it could fly.
Tell me, how would you fix the incentives to loophole the hell out of the tax code?
Tell me, how would you fix the incentives to loophole the hell out of the tax code?
Simple, you just don't have any deductions. Or narrow it down to a handful of deductions. The loopholes are not sending in false information to the IRS about how much you made. The loopholes are all the deductions that some know to take and others don't.
For example, I know I make the same amount as another guy at work. We both rent (no mortgage deduction), neither of us have student loans, neither of us are married, and neither of us have kids. We both spend about the same on living expenses, loans, etc. We both file the same way and work for the same employer in the same job. But he used TurboTax and I hired a professional tax accountant. I got almost $2,000 more back on my refund last year than he got.
Roughly the only difference between us was who prepared our taxes. Obviously my tax accountant leveraged more deductions for me than TurboTax did for him.
If there were no deductions, it would be quite simple. Take a certain percent of your income and deduct it to the government and that's it. The deductions cause all the problems.
Now what are the other options?
The flat tax/high sales tax sounds good in theory, but it sucks in practice. We need roughly 20% of GDP for taxes. So 20%+ sales tax on everything? If I'm buying a yacht, or a vacation house, or an airplane why would I buy it in America? Simply put, nobody would. But if you have to buy dinner, buy clothes, put gas in your car, you have to buy that locally. So that kind of tax kills people on the necessity and doesn't impact people on the luxuries. Of course the answer is to give a 'necessities' refund, which would force the actual rate to be raised even higher. Do you think anyone is buying a luxury item in the US when the sales tax is 35%?
You can strike out the idea of a luxury tax, we've tried it and it failed spectaculary.
High property taxes would put a permanent end to any kind of housing market recovery.
Corporate taxes are even less workable than income taxes.
And it has been shown that spending is far more flexible than income. I.e. we often hear the argument that people move to low tax states (which mostly they don't, but let's say conservatives are right and they do), which is easier, taking your vacation to a non-US destination or getting your company to move out of the country? Income is fundamentally less flexible than spending.
Any of the other plans come out really regressive. The best way to capture tax revenue fairly is through income tax, if you eliminate the loopholes it should capture nearly everyone equally.
For example, I know I make the same amount as another guy at work. We both rent (no mortgage deduction), neither of us have student loans, neither of us are married, and neither of us have kids. We both spend about the same on living expenses, loans, etc. We both file the same way and work for the same employer in the same job. But he used TurboTax and I hired a professional tax accountant. I got almost $2,000 more back on my refund last year than he got.
Roughly the only difference between us was who prepared our taxes. Obviously my tax accountant leveraged more deductions for me than TurboTax did for him.
If there were no deductions, it would be quite simple. Take a certain percent of your income and deduct it to the government and that's it. The deductions cause all the problems.
Now what are the other options?
The flat tax/high sales tax sounds good in theory, but it sucks in practice. We need roughly 20% of GDP for taxes. So 20%+ sales tax on everything? If I'm buying a yacht, or a vacation house, or an airplane why would I buy it in America? Simply put, nobody would. But if you have to buy dinner, buy clothes, put gas in your car, you have to buy that locally. So that kind of tax kills people on the necessity and doesn't impact people on the luxuries. Of course the answer is to give a 'necessities' refund, which would force the actual rate to be raised even higher. Do you think anyone is buying a luxury item in the US when the sales tax is 35%?
You can strike out the idea of a luxury tax, we've tried it and it failed spectaculary.
High property taxes would put a permanent end to any kind of housing market recovery.
Corporate taxes are even less workable than income taxes.
And it has been shown that spending is far more flexible than income. I.e. we often hear the argument that people move to low tax states (which mostly they don't, but let's say conservatives are right and they do), which is easier, taking your vacation to a non-US destination or getting your company to move out of the country? Income is fundamentally less flexible than spending.
Any of the other plans come out really regressive. The best way to capture tax revenue fairly is through income tax, if you eliminate the loopholes it should capture nearly everyone equally.
Income tax is the easiest loophole: what income?
You are actually less likely to see a no-deduction income tax system than the abolishment of income tax altogether.
You are actually less likely to see a no-deduction income tax system than the abolishment of income tax altogether.
IMHO, a constitutionally mandated flat tax of no more than x% (with war time and emergency exceptions) and no deductions, credits, exemptions or any type of offset allowed is the best solution.
Everyone pays the same % and can plan on that happening every year.
But this will probably never happen because politicians can make many things happen through the tax code and many special interests make extensive use of tax code. There is both good and bad that these lead to.
Anything else we do is tinkering, because new codes that close loopholes will eventually lead to new codes that create new loopholes. Still a tinker here and a tinker there and maybe your can create a teapot out of a cauldron. Tinkering a plane out of a car may be easier than tinkering our income tax into better system.
Anything else we do is tinkering, because new codes that close loopholes will eventually lead to new codes that create new loopholes. Still a tinker here and a tinker there and maybe your can create a teapot out of a cauldron. Tinkering a plane out of a car may be easier than tinkering our income tax into better system.
So now you see. The pragmatic side of me says that it is better to err on the side of the individual than the side of the ginormous government.
That's why I support getting rid of the income tax altogether.
That's why I support getting rid of the income tax altogether.
Convince the loophole abusers to support a new tax system that incentivizes what needs to be incentivized, and funds what we as a society decide needs to be funded. The hard part is finding that tax system. I think the needed change is possible, but I think it'll require things getting so bad that even the worst of abusers are convinced that there's a problem.
> Convince the loophole abusers to support a new tax system that incentivizes what needs to be incentivized,
Every "loophole abuser" believes that her incentive is something that should be incentivized.
The only way to stop the gaming of tax incentives is to eliminate all tax incentives.
Every "loophole abuser" believes that her incentive is something that should be incentivized.
The only way to stop the gaming of tax incentives is to eliminate all tax incentives.
By definition, the worst of the abusers will benefit the most so why would they ever see anything wrong?
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