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Gross income isn't taxed, but profits are. However, I do agree that the annual basis of corporate taxation creates odd incentives - if on December 31st a compa

Gross income isn't taxed, but profits are. However, I do agree that the annual basis of corporate taxation creates odd incentives - if on December 31st a company finishes the year with $10 million in cash, and on January 1st they spend $9 million, they will still pay tax on the $10 million, while if they spent it just a few hours before, they would have just paid tax on $1 million. Estonia's corporate tax system seems more sensible to me; profits are untaxed until distributed to shareholders, therefore a company can accumulate as much as needed for more long-term spending. The $9 million in spending will be deducted for the year's taxation period of course, but that leads to the situation of the company paying say, $3 million in tax one year, then $0 in tax for the next period, which seems similar to Netflix's case as per the article.

airstrike 8y ago
That's not how this works. You pay taxes on what you earn, not on your cash balance. The company will always pay taxes on the $10 million, regardless of when it spends the $9. Also GAAP taxes are different from cash taxes paid to the IRS.
- ivalm 8y ago
  Business expenses are deductible. For example, if you are a reseller, you can spend before the end of the year to increase your inventory (and decrease your profits for that year).
  - airstrike 8y ago
    Only operating expenses, but in any case you will pay more next year.
  - scott00 8y ago
    What you describe only works for cash basis taxpayers. Public companies are all accrual basis taxpayers. Under accrual accounting increasing your inventory affects the financial statements as follows: * Balance sheet: decreases cash/cash equivalents entry and increases the inventory balance sheet entry (in equal amounts), resulting in no change to net assets or equity * Income statement: no effect * Cash flow statement: will show up as a change to inventory, reducing operating cash flow and total cash flow
- joefourier 8y ago
  That's absolutely false, otherwise all low-margin businesses would go bankrupt from taxation, and Netflix would have paid taxes on their profits in the above article.

airstrike 8y ago

That's not how this works. You pay taxes on what you earn, not on your cash balance. The company will always pay taxes on the $10 million, regardless of when it spends the $9. Also GAAP taxes are different from cash taxes paid to the IRS.

ivalm 8y ago
Business expenses are deductible. For example, if you are a reseller, you can spend before the end of the year to increase your inventory (and decrease your profits for that year).
- airstrike 8y ago
  Only operating expenses, but in any case you will pay more next year.
- scott00 8y ago
  What you describe only works for cash basis taxpayers. Public companies are all accrual basis taxpayers. Under accrual accounting increasing your inventory affects the financial statements as follows: * Balance sheet: decreases cash/cash equivalents entry and increases the inventory balance sheet entry (in equal amounts), resulting in no change to net assets or equity * Income statement: no effect * Cash flow statement: will show up as a change to inventory, reducing operating cash flow and total cash flow
joefourier 8y ago
That's absolutely false, otherwise all low-margin businesses would go bankrupt from taxation, and Netflix would have paid taxes on their profits in the above article.