4 ms·

>reduce their tax burden Why do people always make this argument? Loss is loss. You're financially better off if you make money, even if you have to pay taxes

by tyrust 9y ago

>reduce their tax burden Why do people always make this argument? Loss is loss. You're financially better off if you make money, even if you have to pay taxes on it.

Kiro 9y ago
Yeah, I don't understand how this reduces anything. Can someone explain?
- simaracode 9y ago
  You basically can take a Tax deduction on capital losses, meaning paying less tax (Super simplifying the complex US Tax Code) https://www.investopedia.com/articles/investing/062713/capital-losses-and-tax.asp https://www.investopedia.com/articles/investing/062713/capit...
- tyrust 9y ago
  You pay taxes on capital gains. Suppose that Epic made P income from Paragon and I income from everything else. They are taxed at T. So if they return P to customers, that's a loss. So they will pay (I - P) * T in taxes and end up with (I - P) * (1 - T). Suppose they kept P, that's gain. So they will pay (I + P) * T in taxes and end up with (I + P) * (1 - T). So even though they pay less in taxes ((I - P) * T < (I + P) * T), they will end up with less money ((I - P) * (1 - T) < (I + P) * (1 - T)).
  - mbesto 9y ago
    Whoa, even I couldn't follow this :) Basically, what it means is the following: Year 1 - I spent $10M on Paragon (let's pretend I've made a single dollar from it). I therefore have negative -$10M in profit, so I pay zero taxes. Year 2 - I shut Paragon down. I still have $10M in losses from Paragon. Fortnite does $30M in Revenue and it cost me $20M to build Fortnite in Year 2. Theoretically I profited $10M in year 2 and I'd have to pay ~30% (thats not the real number, so don't correct me) of that in taxes, so I really only get to keep $7M of that to reinvest. But I get to carry my loss forward from Year 1 onwards. So in theory I get to keep more of my profit due to a smaller tax burden. Generally speaking this is usually done over 5 years. So I'd take $10M and amortize it $2M ever year. Meaning Year 2, instead of paying 30% of $10M, I would pay 30% of 8M, so $2.4M versus $3M. It's obviously way more complicated than this, but this is the gist.
    - tyrust 9y ago
      You're describing the situation assuming that Epic has already taken the loss. I'm describing the tradeoff between intentionally taking the loss (i.e. allowing returns of the game) vs keeping the profits they've made.
  - dorgo 9y ago
    I don't get your math, but (I+P) - (I-P) = 2P. It seems wrong that that the difference between the two scenarios is 2P.
- IshKebab 9y ago
  It reduces the taxes they pay, but only because they make less profit. They still have less money and it is in no way better than if Paragon had made a profit. The "yeay it failed! we get a tax write-off" thing is stupid and wrong.
gcb0 9y ago
its not that clear when you international subsidiaries. companies, when it comes to taxes, can have the cake and eat it too.

by tyrust 9y ago

>reduce their tax burden Why do people always make this argument? Loss is loss. You're financially better off if you make money, even if you have to pay taxes on it.

Kiro 9y ago

Yeah, I don't understand how this reduces anything. Can someone explain?

simaracode 9y ago
You basically can take a Tax deduction on capital losses, meaning paying less tax (Super simplifying the complex US Tax Code) https://www.investopedia.com/articles/investing/062713/capital-losses-and-tax.asp https://www.investopedia.com/articles/investing/062713/capit...
tyrust 9y ago
You pay taxes on capital gains. Suppose that Epic made P income from Paragon and I income from everything else. They are taxed at T. So if they return P to customers, that's a loss. So they will pay (I - P) * T in taxes and end up with (I - P) * (1 - T). Suppose they kept P, that's gain. So they will pay (I + P) * T in taxes and end up with (I + P) * (1 - T). So even though they pay less in taxes ((I - P) * T < (I + P) * T), they will end up with less money ((I - P) * (1 - T) < (I + P) * (1 - T)).
- mbesto 9y ago
  Whoa, even I couldn't follow this :) Basically, what it means is the following: Year 1 - I spent $10M on Paragon (let's pretend I've made a single dollar from it). I therefore have negative -$10M in profit, so I pay zero taxes. Year 2 - I shut Paragon down. I still have $10M in losses from Paragon. Fortnite does $30M in Revenue and it cost me $20M to build Fortnite in Year 2. Theoretically I profited $10M in year 2 and I'd have to pay ~30% (thats not the real number, so don't correct me) of that in taxes, so I really only get to keep $7M of that to reinvest. But I get to carry my loss forward from Year 1 onwards. So in theory I get to keep more of my profit due to a smaller tax burden. Generally speaking this is usually done over 5 years. So I'd take $10M and amortize it $2M ever year. Meaning Year 2, instead of paying 30% of $10M, I would pay 30% of 8M, so $2.4M versus $3M. It's obviously way more complicated than this, but this is the gist.
  - tyrust 9y ago
    You're describing the situation assuming that Epic has already taken the loss. I'm describing the tradeoff between intentionally taking the loss (i.e. allowing returns of the game) vs keeping the profits they've made.
- dorgo 9y ago
  I don't get your math, but (I+P) - (I-P) = 2P. It seems wrong that that the difference between the two scenarios is 2P.
IshKebab 9y ago
It reduces the taxes they pay, but only because they make less profit. They still have less money and it is in no way better than if Paragon had made a profit. The "yeay it failed! we get a tax write-off" thing is stupid and wrong.

gcb0 9y ago

its not that clear when you international subsidiaries. companies, when it comes to taxes, can have the cake and eat it too.