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Can you elaborate more on this? You know you can also report losses to reduce taxes? Or do you mean that they spent their profits on non returnable expenses(e.g

Can you elaborate more on this? You know you can also report losses to reduce taxes? Or do you mean that they spent their profits on non returnable expenses(e.g. A vacation)

jjeaff 9y ago
One example is that your parents pass the family business or farm on to you when they die, the tax man comes knocking and wants his 40%. And the tax man says that family business is worth $10 million. You know you could never get that much money in a sale, but the IRS doesn't care. Have a fire sale and pay them the millions you owe in taxes. It turns out you were only able to sell it for about how much you owe in taxes. So, they adjust the appraised value and lower your tax burden right? Nope. Pay up and you may need to kick in a bit of your own money to make up the difference. Your welcome, says the IRS.
- heyyyouu 9y ago
  This is when you fight the IRS in bankruptcy court -- it's your only shot.
niij 9y ago
I believe GP is referring to people exercising options.
AdamJacobMuller 9y ago
From a business perspective, if you spend money on illiquid assets expecting to make a profit, say, short-term profit that doesn't materialize or will take longer than expected to materialize the business will still owe taxes on the value of those assets but you may not have the liquid cash to pay for those assets. As an example, say your LLC buys a million dollars worth of round iPhone cases because you're 100% sure Apple is releasing a round iPhone before Christmas 2017. Apple comes out and says "sorry, we're pushing the release to Christmas 2018!" Now, your company has 1m in assets, probably more by a fair market value of round iPhone cases because you expected to sell them for 10m, so now the value of your company has increased by some millions of dollars. Now, say you bet 100% of your liquid cash on that (regardless of if that's a smart idea or not), how do you pay your tax bill? You could liquidate your round iPhone cases to someone today, but, you'll lose a ton of money on them. This isn't a 100% perfect example, in a lot of ways, but it does indicate a highly contrived example of ways in which you can have 0 free cash while having huge reportable income.
- jjeaff 9y ago
  Huh? You don't pay taxes on the estimated value of your assets. You would only pay taxes on your annualized profits. In your example, you would show your cases as assets, but you wouldn't book any revenue or profit until you started selling them. And if next year, you only sell $1m worth of cases and you don't think you will be able to sell any more of the cases, then you write the rest off as a loss and would pay no taxes since you didn't make a profit.
  - true_religion 9y ago
    Actually businesses can be forced to pay state or local tax on physical assets. It's called tangible property tax, and rules differ per jurisdiction. That said the irs doesn't do this and doesn't count unrealized returns.
    - jjeaff 9y ago
      Even in the case of tangible property tax, this would not apply. Tangible property tax refers to capital expenses like buildings, furniture, etc. Inventory would not be subject.
- Alex3917 9y ago
  Or you buy $10,000 worth of Ethereum, and the value goes up to $100,000. Then you convert the Ethereum into Dogecoin, and your $100,000 worth of Dogecoin goes to $1,000 but you don't sell it before the end of the year.
- davidgould 9y ago
  This example is very confusing. If you buy a bunch of stuff to sell and don't sell it, then there is no income to pay taxes on. If you sell and make a profit, you pay tax on the profit. If you lose money you don't have profits to pay tax on.

Can you elaborate more on this? You know you can also report losses to reduce taxes? Or do you mean that they spent their profits on non returnable expenses(e.g. A vacation)

jjeaff 9y ago

One example is that your parents pass the family business or farm on to you when they die, the tax man comes knocking and wants his 40%. And the tax man says that family business is worth $10 million. You know you could never get that much money in a sale, but the IRS doesn't care. Have a fire sale and pay them the millions you owe in taxes. It turns out you were only able to sell it for about how much you owe in taxes. So, they adjust the appraised value and lower your tax burden right? Nope. Pay up and you may need to kick in a bit of your own money to make up the difference. Your welcome, says the IRS.

heyyyouu 9y ago
This is when you fight the IRS in bankruptcy court -- it's your only shot.

niij 9y ago

I believe GP is referring to people exercising options.

AdamJacobMuller 9y ago

From a business perspective, if you spend money on illiquid assets expecting to make a profit, say, short-term profit that doesn't materialize or will take longer than expected to materialize the business will still owe taxes on the value of those assets but you may not have the liquid cash to pay for those assets. As an example, say your LLC buys a million dollars worth of round iPhone cases because you're 100% sure Apple is releasing a round iPhone before Christmas 2017. Apple comes out and says "sorry, we're pushing the release to Christmas 2018!" Now, your company has 1m in assets, probably more by a fair market value of round iPhone cases because you expected to sell them for 10m, so now the value of your company has increased by some millions of dollars. Now, say you bet 100% of your liquid cash on that (regardless of if that's a smart idea or not), how do you pay your tax bill? You could liquidate your round iPhone cases to someone today, but, you'll lose a ton of money on them. This isn't a 100% perfect example, in a lot of ways, but it does indicate a highly contrived example of ways in which you can have 0 free cash while having huge reportable income.

jjeaff 9y ago
Huh? You don't pay taxes on the estimated value of your assets. You would only pay taxes on your annualized profits. In your example, you would show your cases as assets, but you wouldn't book any revenue or profit until you started selling them. And if next year, you only sell $1m worth of cases and you don't think you will be able to sell any more of the cases, then you write the rest off as a loss and would pay no taxes since you didn't make a profit.
- true_religion 9y ago
  Actually businesses can be forced to pay state or local tax on physical assets. It's called tangible property tax, and rules differ per jurisdiction. That said the irs doesn't do this and doesn't count unrealized returns.
  - jjeaff 9y ago
    Even in the case of tangible property tax, this would not apply. Tangible property tax refers to capital expenses like buildings, furniture, etc. Inventory would not be subject.
Alex3917 9y ago
Or you buy $10,000 worth of Ethereum, and the value goes up to $100,000. Then you convert the Ethereum into Dogecoin, and your $100,000 worth of Dogecoin goes to $1,000 but you don't sell it before the end of the year.
davidgould 9y ago
This example is very confusing. If you buy a bunch of stuff to sell and don't sell it, then there is no income to pay taxes on. If you sell and make a profit, you pay tax on the profit. If you lose money you don't have profits to pay tax on.