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The IRS is not stupid. It's perfectly capable of distinguishing a real business from a dummy business set up just to pay personal expenses. There are all kinds
by harryh 10y ago
The IRS is not stupid. It's perfectly capable of distinguishing a real business from a dummy business set up just to pay personal expenses. There are all kinds of rules about this sort of thing.
- ska 10y agoThe IRS is not stupid, but wealthy enough people have been very effective at creating and exercising approaches to bring their marginal tax rates down to impressively low numbers. So if the IRS is smart but this still happens a lot, there must be something else at work, no?
- harryh 10y agoThe primary way that wealthy people bring down their marginal tax rates is buy earning more of their income as capital gains not through the creation of phony businesses to pay for their personal expenses.
- ska 10y ago[edited summary] Apparently techniques exist to let you capital gains rather than income, increase deductions, or both. In some cases chase subsidies, which is roughly equivalent. And (cf Panama papers) obviously offshoring. All theoretical interest on my part, so who knows. Government estimates on lost revenue from this range wildly (order 1billion to 100billion) from what I've seen, but they are at least convinced it happens in significant amounts.
- maxerickson 10y agoDo you have examples that aren't long term capital gains? (which enjoy a low rate but are not really sophisticated financial engineering)
- deleted 10y ago[deleted]
- unclebucknasty 10y agoIt's not the IRS as much as the loopholes bought by special interests.
- harryh 10y agoWhat loopholes exactly?
- unclebucknasty 10y agoPretty easy to find online if you're genuinely interested. Start with oil.
- harryh 10y agoOh, you're talking about the corporate tax code. OK, plenty of crazy things there (though the line between "bad loophole" and "unavoidable complexity" is narrower than most think). This is (as was said elsewhere in this thread) one of the biggest reasons to get rid of the corporate tax code completely and just tax people where things are much simpler and much less susceptible to these sorts of problems.
- deleted 10y ago[deleted]
- 542458 10y agoIsn't the correct tax dodge here to use an S-corp and take all your payments through that, since Trump has also promised to slash the passthrough rate to 15%? This way would even be completely legal as far as I can tell.
- harryh 10y agoSure, go create an S-Corp. And, to the extent that it's real business you can expense the costs of that business. But don't go try buying a boat or a snowboard or whatever and writing that off as an expense. That would be tax fraud and if you do it at a big scale you will get caught.
- 542458 10y agoOops, maybe I wasn't clear - the tax dodge here is you form an S-corp, and take all your payments through said S-corp (the S-corp doesn't hold onto any more cash than is necessary). Before, a top earner would pay ~39% marginal income tax. But by routing all your income through the S-corp your effective income tax rate drops to 15%, a nearly 25% marginal tax rate cut for top earners. Or am I missing something?
- harryh 10y agoAll S-Corp earnings are passed through to individuals and taxed at individual tax rates. Corporate tax rates are for C-Corps.
- 542458 10y agoNot under Trump's tax plan: > Right now, freelancers, sole proprietors, unincorporated small businesses and pass-through entities are taxed at the high personal income tax rates. [...] The Trump plan addresses this challenge head on with a new business income tax rate within the personal income tax code that matches the 15% corporate tax rate
- 10y ago
- jellicle 10y agoThe IRS is not stupid, but their budget gets cut every year and at this point they are nearly completely ineffective as a tax-compliance organization, lacking the manpower for any sort of real enforcement.
- harryh 10y agoIf you believe that I encourage you to start making up deductions to reduce your tax burden. You'll get to see just how ineffective the IRS is.
- abhv 10y agoIf I own a software business that earns 500k-1m a year, currently, I can organize as an LLC and induce pass-thru income that is taxed marginally at ~50% (federal, state, NYC). If I organize as a C-corp, I pay the corporate rate which is also roughly 40%, and I also get double-taxed on salary and any dividends paid to owners. Under these new rules, if a C-corp gets taxed at 15%, there is a strong incentive to pass all income through this C-corp, even after double-taxation.
- harryh 10y agoWell, the disincentive to make it a C-Corp goes down. But your taxes will still be higher that way: 15% + individual taxes vs just individual taxes. I certainly agree that the double taxation issue is a problem and it would be even better if both situations were taxed the same way but I'm not sure what this has to do with tax evasion.
- unclebucknasty 10y agoYeah, but if you're reinvesting in your company, then you might be better of at 15%, even with double-taxation. Currently, pass-through taxation applies to shareholders even if they don't take a distribution. So, rather than have shareholders pay taxes out of pocket, the company pays the dividend just to cover taxes. That's essentially a ~30% tax on the company. If I switch to a C-corp at 15% then I can minimize dividends while in growth mode to minimize double-taxation. I then pay the much lower 15% corporate rate, leaving me with ~15% more to reinvest.
- harryh 10y agoWith either setup you can reinvest all of your cash flow thus reducing your profit to zero and your tax burden to zero.
- unclebucknasty 10y agoIn theory, sure. But, anyone who has run a pass-through business will tell you that it's a function of timing. If you don't manage to invest it all by the end of the tax year, then it's taxable profit. And, it's nearly impossible to zero out your net by reinvesting it all before some contrived deadline. Even if you could, it is very unlikely that allowing this artificial timeline to drive your investment also happens to represent the best timing or the most efficient allocation of capital.
- ghostly_s 10y agoAnd yet we have Trump's business (cited by the OP), which per public info has possibly been 'doing business' for years without turning a profit or generating any real value.
- harryh 10y agoSay what you want about Trump's business (and there is plenty to say!) but it's clearly a real business. It owns tons of real estate and licenses the Trump brand all over the place.