6 ms·

> Not making money is not the same as making losses. I have rent and bills to pay regardless of whether I'm making money, that is the definition of making a lo

by lugg 7y ago

> Not making money is not the same as making losses. I have rent and bills to pay regardless of whether I'm making money, that is the definition of making a loss.

sokoloff 7y ago
Rent and bills are (in general) not deductible expenses.
- chii 7y ago
  but the rent and bills of a corporation are deductable? Why is it different? A corporation has the same legal rights as a person, but a person has to pay more for these rights. It's unfair imho.
  - sokoloff 7y ago
    Ordinary and necessary business expenses (expenses incurred with a reasonable overall expectation of profit) are, in general, deductible in the US because we tax income. Personal expenses are not. People end up paying all taxes anyway, just sometimes one or two steps removed from the legal entity/TIN who files the returns.
  - temp1831 7y ago
    Let's say you run a gas station, which is a notoriously low margin business. You have $1,050,000 in revenue this year, and $1,000,000 in expenses, so you make $50,000. Let's say you run a small software company, which is a high margin business. You have $1,050,000 in revenue this year, and $500,000 in expenses, so you make $550,000. You should be taxed on the $50,000 and the $550,000, not on the $1,050,000. Otherwise, if business expenses were not deductible, low margin and capital intensive businesses would be punished severely. We would have decreased investment in the economy and everyone would suffer for it. If individuals could deduct their expenses, it would encourage people to spend every penny they make. The mortgage interest deduction is one example where this nudge becomes apparent (albeit real estate has merit as an investment, not just consumption). We already have a low enough savings rate as it is.
    - edwhitesell 7y ago
      At a high level of just considering taxable income that is true. However, the difference is there are a lot more things a corp can do to reduce taxable income than an individual can do. If you happen to be the owner of a corp you can also use those things to your individual benefit. If the argument is to say "income is income", then "expenses are expenses" should apply too. Edit: typo
      - temp1831 7y ago
        If you go to a high level of abstraction, you remove useful distinctions. That is not a productive line of thought. Not all income is the same, and not all expenses are the same. Excise taxes and any "nudge" tax laws make this obvious. It is true that there are some tax deductions that are abused. However, the effect of encouraging investment by businesses is much more important. >If you happen to be the owner of a corp you can also use those things to your individual benefit. This could be considered an abuse. However, the benefit of encouraging investment by businesses far outweighs the negative of this abuse. We tend to focus our attention on a few big individuals who cheat, and this excessive focus throws off our moral intuitions. Heck, the gas station owner might have deducted the cost of buying a toolbox needed at the workplace, and then borrowed a wrench from that toolbox to go home and fix his plumbing. That would be fine with me, to the extent that all the damn tax paperwork stops being worth keeping track of.
        edwhitesell 7y ago
        > If you go to a high level of abstraction, you remove useful distinctions. That's my point and what I was extrapolating from your high-level comment. If you're going to give an example, it's good to talk about things the gas station and software company do to reduce that income to, or below, zero. Things that can provide direct, positive, net gain impact on ownership of the corp. However, those same things are not available to employees of the corp. To me, the rules should be the same for _any_ taxable entity.
      - chii 7y ago
        > the difference is there are a lot more things a corp can do to reduce taxable income than an individual can do. this is exactly it. Rental costs are deducted as expenses for a corporation, but the same rental expense cannot be deducted from income. Arguably, the cost of staying alive for a person is an expense for making the income! To make it catagorized would be too complex though - i would propose that personal income should be average-able across that person's lifetime. I.e., if i made $1000000 in one year, i should be able to spread the income from when I first started working (and paying taxes), so that my average income per year is the same number. Then you back pay all the "missing" taxes from those years, rather than suddenly jump to the $1,000,000 tax bracket and the gov't taking 45% from you in one go.
  - mikekchar 7y ago
    Sounds silly, but feel free to become a corporation. Well, it's not quite as easy as I say. When I went remote I had to start my own contracting company. Because I live in Japan and (at the time) corporations were the default company configuration, my contracting company was formed as a corporation. There are lots of advantages: - I can deduct the rent for my work space. In fact, theoretically in Japanese law I can even rent an entire building and offer myself the ability to rent living space for about $150 per month, with the company eating the rest as a loss. Probably you can do something similar in other countries (although I couldn't actually do it... because in order to rent a place I need a company and in order to form a company I need an address... so... well, it didn't quite work out). - Internet, some of my utilities, etc, etc are expenses. Some furniture as well. Some of it has to be depreciated, though, so I don't get the benefit immediately. - I can set my salary to anything I want. If it is beneficial for the company to make a profit and for me to make peanuts, then it's fine. If the opposite is beneficial, then it's fine. - A fair number of expenses can be deducted by having a life insurance plan for employees, etc, etc. On the downside: - I have to submit all my accounts using dual entry accounting. The government gets stroppy if I make a mistake because they expect me to be a corporation. - I have to submit year end accounting. Seriously, I have no time for this and employ a wonderful tax accountant to do this for me. My tax accountant saves me money, but getting a good one is like getting a good car mechanic -- it's hit or miss and can be very expensive if you choose the wrong person. - I have to do the payroll, calculate withholding tax, pay fees and employment taxes. I have to do this every month and if I'm late I get a really big fine. Luckily my wife does this (seriously, I would never do this without my wife doing all the heavy lifting) - I have stupid amounts of bank fees because I have to transfer money between 3 different banks just to pay myself. We actually use a sneaker net in one phase: I literally withdraw our payroll from the ATM and deposit in another ATM just to save $20 in transfer fees. Of course, I have to document all of this so the government knows I'm not fiddling anything. In the end, it's an absolute PITA. I don't really recommend it. I think I save a little money this way over when I was being paid salary. It's really hard to tell, though. However, if you factor in all the work that I need to do, I think I'm being paid about $2 an hour for that effort. Or I should say my wife is. If I didn't have her, it would not be worth it at all.
    - 7y ago
  - fjsolwmv 7y ago
    You get a personal exemption and a standard deduction for your living expenses. Yes, it's unfairly low compared to Jeff Bezos's deduction for his Gulfstream plane and executive cafe.
  - cascom 7y ago
    1. There is a practical aspect - every person would have to have a balance sheet/financial statements 2. Those expenses are in the furtherance of generating profits rather than for personal consumption are we really going to give people write offs for their Apple watches and $6 latte’s?
jerf 7y ago
"I have rent and bills to pay regardless of whether I'm making money, that is the definition of making a loss." That is not a loss. That is an exchange of value; you pay $100 for your heating bill and receive $100 of heating. A loss is when you have some value, and it disappears, and you have no compensating value. Buying a stock at $100 and selling it at $50 is a transaction in which you have less money at the end than you had at the beginning, and where you also had no compensating value exchange Normal taxpayers do have rights to do things like carry forward losses in many circumstances. Business do get to be not taxed on expenses, but there are conditions on that. You can tell there are conditions on that because you can't just form an LLC and declare all your expenses to be losses, because you won't meet the conditions for your expenses to be losses. Note that that is the source of the problem, "form an LLC" is something you can totally do very easily, it's the failure for your personal expenses to qualify that is the problem. While it might be emotionally satisfying to tax businesses on expenses, it's not hard to think about it a bit and realize why letting taxpayers deduct all their expenses, or trying to tax businesses on their expenses even when they didn't make a profit, are both not great ideas. (Think about the incentives created. Taxpayers don't need any more incentives to spend all their money on "expenses" as it is, if you've seen the credit card debt statistics.)
- chii 7y ago
  A company paying a cost of $50 to produce widgets for 1 year (and don't sell any that year), then selling all the widgets on the 2nd year for a profit of $100, can claim that they made a loss of $50 in the previous year, and therefore only have $50 that's taxable. A person who works for 1 year for $100 income, then stops working the 2nd year (and live off their income from the 1st year), must pay their taxes at the $100 rate. If they are allowed the same 'carry forward' as a corp, they should pay at the tax rate of $50 for both years, rather than at $100 for the first year, and $0 at the 2nd year. And yet, this isn't allowed for a person. Of course, you could claim that the gov't can't tell that the first $100 is supposed to be 'averaged out' in the future. So would the situation be any different if you lived off savings for the first year, and replenished them in the 2nd year? I don't think this is any different.
  - 7y ago
caprese 7y ago
I love the debate on how evenly distributed the government stuffs its coffers It pits everyone against each other to make sure someone else gives more money to the same entity Fascinating

by lugg 7y ago

> Not making money is not the same as making losses. I have rent and bills to pay regardless of whether I'm making money, that is the definition of making a loss.

sokoloff 7y ago

Rent and bills are (in general) not deductible expenses.

chii 7y ago
but the rent and bills of a corporation are deductable? Why is it different? A corporation has the same legal rights as a person, but a person has to pay more for these rights. It's unfair imho.
- sokoloff 7y ago
  Ordinary and necessary business expenses (expenses incurred with a reasonable overall expectation of profit) are, in general, deductible in the US because we tax income. Personal expenses are not. People end up paying all taxes anyway, just sometimes one or two steps removed from the legal entity/TIN who files the returns.
- temp1831 7y ago
  Let's say you run a gas station, which is a notoriously low margin business. You have $1,050,000 in revenue this year, and $1,000,000 in expenses, so you make $50,000. Let's say you run a small software company, which is a high margin business. You have $1,050,000 in revenue this year, and $500,000 in expenses, so you make $550,000. You should be taxed on the $50,000 and the $550,000, not on the $1,050,000. Otherwise, if business expenses were not deductible, low margin and capital intensive businesses would be punished severely. We would have decreased investment in the economy and everyone would suffer for it. If individuals could deduct their expenses, it would encourage people to spend every penny they make. The mortgage interest deduction is one example where this nudge becomes apparent (albeit real estate has merit as an investment, not just consumption). We already have a low enough savings rate as it is.
  - edwhitesell 7y ago
    At a high level of just considering taxable income that is true. However, the difference is there are a lot more things a corp can do to reduce taxable income than an individual can do. If you happen to be the owner of a corp you can also use those things to your individual benefit. If the argument is to say "income is income", then "expenses are expenses" should apply too. Edit: typo
    - temp1831 7y ago
      If you go to a high level of abstraction, you remove useful distinctions. That is not a productive line of thought. Not all income is the same, and not all expenses are the same. Excise taxes and any "nudge" tax laws make this obvious. It is true that there are some tax deductions that are abused. However, the effect of encouraging investment by businesses is much more important. >If you happen to be the owner of a corp you can also use those things to your individual benefit. This could be considered an abuse. However, the benefit of encouraging investment by businesses far outweighs the negative of this abuse. We tend to focus our attention on a few big individuals who cheat, and this excessive focus throws off our moral intuitions. Heck, the gas station owner might have deducted the cost of buying a toolbox needed at the workplace, and then borrowed a wrench from that toolbox to go home and fix his plumbing. That would be fine with me, to the extent that all the damn tax paperwork stops being worth keeping track of.
      - edwhitesell 7y ago
        > If you go to a high level of abstraction, you remove useful distinctions. That's my point and what I was extrapolating from your high-level comment. If you're going to give an example, it's good to talk about things the gas station and software company do to reduce that income to, or below, zero. Things that can provide direct, positive, net gain impact on ownership of the corp. However, those same things are not available to employees of the corp. To me, the rules should be the same for _any_ taxable entity.
    - chii 7y ago
      > the difference is there are a lot more things a corp can do to reduce taxable income than an individual can do. this is exactly it. Rental costs are deducted as expenses for a corporation, but the same rental expense cannot be deducted from income. Arguably, the cost of staying alive for a person is an expense for making the income! To make it catagorized would be too complex though - i would propose that personal income should be average-able across that person's lifetime. I.e., if i made $1000000 in one year, i should be able to spread the income from when I first started working (and paying taxes), so that my average income per year is the same number. Then you back pay all the "missing" taxes from those years, rather than suddenly jump to the $1,000,000 tax bracket and the gov't taking 45% from you in one go.
- mikekchar 7y ago
  Sounds silly, but feel free to become a corporation. Well, it's not quite as easy as I say. When I went remote I had to start my own contracting company. Because I live in Japan and (at the time) corporations were the default company configuration, my contracting company was formed as a corporation. There are lots of advantages: - I can deduct the rent for my work space. In fact, theoretically in Japanese law I can even rent an entire building and offer myself the ability to rent living space for about $150 per month, with the company eating the rest as a loss. Probably you can do something similar in other countries (although I couldn't actually do it... because in order to rent a place I need a company and in order to form a company I need an address... so... well, it didn't quite work out). - Internet, some of my utilities, etc, etc are expenses. Some furniture as well. Some of it has to be depreciated, though, so I don't get the benefit immediately. - I can set my salary to anything I want. If it is beneficial for the company to make a profit and for me to make peanuts, then it's fine. If the opposite is beneficial, then it's fine. - A fair number of expenses can be deducted by having a life insurance plan for employees, etc, etc. On the downside: - I have to submit all my accounts using dual entry accounting. The government gets stroppy if I make a mistake because they expect me to be a corporation. - I have to submit year end accounting. Seriously, I have no time for this and employ a wonderful tax accountant to do this for me. My tax accountant saves me money, but getting a good one is like getting a good car mechanic -- it's hit or miss and can be very expensive if you choose the wrong person. - I have to do the payroll, calculate withholding tax, pay fees and employment taxes. I have to do this every month and if I'm late I get a really big fine. Luckily my wife does this (seriously, I would never do this without my wife doing all the heavy lifting) - I have stupid amounts of bank fees because I have to transfer money between 3 different banks just to pay myself. We actually use a sneaker net in one phase: I literally withdraw our payroll from the ATM and deposit in another ATM just to save $20 in transfer fees. Of course, I have to document all of this so the government knows I'm not fiddling anything. In the end, it's an absolute PITA. I don't really recommend it. I think I save a little money this way over when I was being paid salary. It's really hard to tell, though. However, if you factor in all the work that I need to do, I think I'm being paid about $2 an hour for that effort. Or I should say my wife is. If I didn't have her, it would not be worth it at all.
  - 7y ago
- fjsolwmv 7y ago
  You get a personal exemption and a standard deduction for your living expenses. Yes, it's unfairly low compared to Jeff Bezos's deduction for his Gulfstream plane and executive cafe.
- cascom 7y ago
  1. There is a practical aspect - every person would have to have a balance sheet/financial statements 2. Those expenses are in the furtherance of generating profits rather than for personal consumption are we really going to give people write offs for their Apple watches and $6 latte’s?

jerf 7y ago

"I have rent and bills to pay regardless of whether I'm making money, that is the definition of making a loss." That is not a loss. That is an exchange of value; you pay $100 for your heating bill and receive $100 of heating. A loss is when you have some value, and it disappears, and you have no compensating value. Buying a stock at $100 and selling it at $50 is a transaction in which you have less money at the end than you had at the beginning, and where you also had no compensating value exchange Normal taxpayers do have rights to do things like carry forward losses in many circumstances. Business do get to be not taxed on expenses, but there are conditions on that. You can tell there are conditions on that because you can't just form an LLC and declare all your expenses to be losses, because you won't meet the conditions for your expenses to be losses. Note that that is the source of the problem, "form an LLC" is something you can totally do very easily, it's the failure for your personal expenses to qualify that is the problem. While it might be emotionally satisfying to tax businesses on expenses, it's not hard to think about it a bit and realize why letting taxpayers deduct all their expenses, or trying to tax businesses on their expenses even when they didn't make a profit, are both not great ideas. (Think about the incentives created. Taxpayers don't need any more incentives to spend all their money on "expenses" as it is, if you've seen the credit card debt statistics.)

chii 7y ago
A company paying a cost of $50 to produce widgets for 1 year (and don't sell any that year), then selling all the widgets on the 2nd year for a profit of $100, can claim that they made a loss of $50 in the previous year, and therefore only have $50 that's taxable. A person who works for 1 year for $100 income, then stops working the 2nd year (and live off their income from the 1st year), must pay their taxes at the $100 rate. If they are allowed the same 'carry forward' as a corp, they should pay at the tax rate of $50 for both years, rather than at $100 for the first year, and $0 at the 2nd year. And yet, this isn't allowed for a person. Of course, you could claim that the gov't can't tell that the first $100 is supposed to be 'averaged out' in the future. So would the situation be any different if you lived off savings for the first year, and replenished them in the 2nd year? I don't think this is any different.
- 7y ago

caprese 7y ago

I love the debate on how evenly distributed the government stuffs its coffers It pits everyone against each other to make sure someone else gives more money to the same entity Fascinating