7 ms·

I wonder how feasible it is for individuals (or groups of individuals?) in the US, to also incorporate themselves and, through the same or similar loopholes, al

I wonder how feasible it is for individuals (or groups of individuals?) in the US, to also incorporate themselves and, through the same or similar loopholes, also pay no tax... How would the IRS respond in those instances. Has that been tried? Is anyone aware of anything like that? Is the cost of such a scheme prohibitive for an individual vs. a large Corp? I'd be curious what the challenges and outcome of such an experiment would be.

jasonv 6y ago
It’s not expensive to incorporate, but full time employment can’t really be paid to an EIN. You need to be a contractor or a vendor. Lots of people do it. Self employment comes with some risks, but if you own it, and convert your employment towards it, it can have benefits. Its how landscapers drive F250s, for example.
ryanmarsh 6y ago
LOL this is primarily why many self employed people eventually incorporate. Tax reduction. You should try it some time.
- MuffinFlavored 6y ago
  I can’t figure out what to deduct that is more than the $12.2k single filer deductible. I have $500k/yr I’d love to pay less taxes on at the moment due to a booming side business + healthy salary. Can’t find any deductions worth my time and the CPA filing fees.
  - hansvm 6y ago
    To be clear, you are already deducting any and all expenses related to your side business even if you're only filing as self-employed?
  - nmfisher 6y ago
    In Australia, it’s not so much deductions (home office, car, computer, phone, etc), as much as absurdly legal practices like “distributing” income to your family. This means you can divvy up your income so it’s taxed at each family member’s marginal rate (rather than your own top-line consolidated rate). That might sound reasonable, until you realize that those family members never see that money. The “distribution” is a complete fiction. I’m usually fairly conservative when it comes to taxes, but I’m astonished this is allowed to continue.
  - Rebelgecko 6y ago
    If you live in a state with income tax, sounds like you'd be at least $10k of the way there. If you get a mortgage, bobs your uncle
  - ryanmarsh 6y ago
    I bet a CPA could.
    - MuffinFlavored 6y ago
      CPA wanted $3,500 to set up an LLC and turn it into an S-corp + the filing for the year. Said we could deduct 80% of my car and some knick knack stuff. Ran the math, came out to be breakeven. Get $3,500 back to spend $3,500, risk an audit, lots of headache, not worth it to me.
      - stjohnswarts 6y ago
        Probably the best reason for an LLC in your case is to split up your finances and protect your personal property (house/cash/other assets) in case your business gets sued. I don't think the tax advantages are huge but the potential losses difference if sued can certainly be huge if you don't separate your assets. I'd be surprised if your accountant didn't bring that up though.
- stjohnswarts 6y ago
  It's not that big of a deal. It can help you with investing back into your business, especially if you have a lot of hardware to buy to operate it, as well as easier to write off business travel, rent, etc. However those are all practical. Your individual income will still be taxed at the same rate. It really just makes your paperwork a bit easier than if you went with a sole proprietorship, there's not a huge difference in overall tax rate.
gscott 6y ago
People have tried and the problem is when you want to bring the money back to use it on something. Say you setup a licensing company on an island nation that use to then charge yourself $10,000 a month to license the software you wrote... that you transferred there. Now lets say you want to buy a house and you bring back a certain amount of money. That money is taxable and that is where people mess up they don't report it. Big companies like Apple instead of bringing the money back they borrow billions of dollars at low interest rates. This lets them keep their money offshore where they invest it to make a bigger return then their interest rate on borrowing in the US. Apple also has a routine for money in the US. You will find in Nevada Apple has an investment corporation. They will do the same thing, send the ownership of software to Nevada, charge their company in some xyz state (CA) and then they use that money in Nevada to invest it for more money then it costs them to borrow. So apple is covered both ways. https://en.wikipedia.org/wiki/Braeburn_Capital#:~:text=Braeburn%20Capital%20Inc.%20is%20an,McCarran%20Boulevard%20in%20Reno https://en.wikipedia.org/wiki/Braeburn_Capital#:~:text=Braeb.... https://www.businessinsider.com/how-apple-dodges-billions-in-taxes-2012-4 https://www.businessinsider.com/how-apple-dodges-billions-in...
- redis_mlc 6y ago
  You're partly correct but here's an overview of what's really going on. The money is "brought back" (if it even left) into segregated accounts in the US. Most of that US off-shore money is in New York to avoid currency risks, etc. Then those accounts are used as collateral (if needed. I doubt if anybody says to Apple, "Where's your collateral?") for loans. Also, the biggest money havens in the world are 2 US states, with special privacy laws. All those guys playing games in Panama, etc. were better off just using US state tax shelters.
  - demadog 6y ago
    Which states are those?
    - wolco2 6y ago
      Delaware to incorporate and East Texas to file patents?
gnicholas 6y ago
Former international tax lawyer here. This would not be possible because these benefits are largely based on international structures, and any non-US corporation owned by a few US-based individuals would be designated as a Controlled Foreign Corporation (CFC). This would prevent you from reaping the biggest benefits from a taxation perspective. The reason that publicly-traded companies are not CFCs is that a CFC must have 50% of the vote or value of the company owned by US Shareholders. "US Shareholder" is defined as a US person that owns at least 10% of the company. So even if a conglomerate is almost entirely owned by US persons, it would not be a CFC unless the US persons that own it also meet the 10% threshold. The reason for this cutoff is that the CFC rule is meant to prevent small groups of people who can actually exercise control over a foreign company from getting together and colluding to keep profits off-shore. But this is not a risk in the case of companies whose ownership is spread among many small shareholders. As a result, big companies are able to take advantage of complex international structures in ways that small groups of individuals cannot.
- sooheon 6y ago
  So small groups of individuals can take advantage of this given they are international enough?
  - bobthepanda 6y ago
    Presumably, people who are international enough aren't being taxed by the US in the first place.
    - sooheon 6y ago
      But who would have their own government taxes to dodge.
      - gnicholas 6y ago
        Many countries do not tax their residents on a worldwide basis. So if a person from Country X earns money in Country Y, they are simply not taxed on it in Country X. They don't need to set up a complicated foreign corporate structure to avoid immediate taxation, as US residents do.
vmception 6y ago
See that’s your first problem, you think everyone has an adversarial relationship with the IRS and that’s simply not true. These structures often require a very collaborative relationship with the IRS with many things approved, elected or notified of in advance. The IRS only cares about compliance, not a hardline on actual revenue collection. The IRS has many doors for compliance.
fyfy18 6y ago
As a US citizen it's somewhat tricky as you are taxed on your worldwide income, but the easiest way is probably to become a tax resident in a country with a low tax rate. Even in the UK, as a contractor/freelancer it's fairly simple to pay single digit percent effective taxes on incomes of £100k+. And that's without even delving into what could be considered a 'tax avoidance' scheme.
- C1sc0cat 6y ago
  Not shure single digit effective is possible nowadays even outside IR35 - and HMRC has unliterally ruled that some professions are in side IR35 eg all it/developer contractors. Actors, film / tv professionals and lawyers etc are for the large part still treated as "self employed"

jasonv 6y ago

It’s not expensive to incorporate, but full time employment can’t really be paid to an EIN. You need to be a contractor or a vendor. Lots of people do it. Self employment comes with some risks, but if you own it, and convert your employment towards it, it can have benefits. Its how landscapers drive F250s, for example.

ryanmarsh 6y ago

LOL this is primarily why many self employed people eventually incorporate. Tax reduction. You should try it some time.

MuffinFlavored 6y ago
I can’t figure out what to deduct that is more than the $12.2k single filer deductible. I have $500k/yr I’d love to pay less taxes on at the moment due to a booming side business + healthy salary. Can’t find any deductions worth my time and the CPA filing fees.
- hansvm 6y ago
  To be clear, you are already deducting any and all expenses related to your side business even if you're only filing as self-employed?
- nmfisher 6y ago
  In Australia, it’s not so much deductions (home office, car, computer, phone, etc), as much as absurdly legal practices like “distributing” income to your family. This means you can divvy up your income so it’s taxed at each family member’s marginal rate (rather than your own top-line consolidated rate). That might sound reasonable, until you realize that those family members never see that money. The “distribution” is a complete fiction. I’m usually fairly conservative when it comes to taxes, but I’m astonished this is allowed to continue.
- Rebelgecko 6y ago
  If you live in a state with income tax, sounds like you'd be at least $10k of the way there. If you get a mortgage, bobs your uncle
- ryanmarsh 6y ago
  I bet a CPA could.
  - MuffinFlavored 6y ago
    CPA wanted $3,500 to set up an LLC and turn it into an S-corp + the filing for the year. Said we could deduct 80% of my car and some knick knack stuff. Ran the math, came out to be breakeven. Get $3,500 back to spend $3,500, risk an audit, lots of headache, not worth it to me.
    - stjohnswarts 6y ago
      Probably the best reason for an LLC in your case is to split up your finances and protect your personal property (house/cash/other assets) in case your business gets sued. I don't think the tax advantages are huge but the potential losses difference if sued can certainly be huge if you don't separate your assets. I'd be surprised if your accountant didn't bring that up though.
stjohnswarts 6y ago
It's not that big of a deal. It can help you with investing back into your business, especially if you have a lot of hardware to buy to operate it, as well as easier to write off business travel, rent, etc. However those are all practical. Your individual income will still be taxed at the same rate. It really just makes your paperwork a bit easier than if you went with a sole proprietorship, there's not a huge difference in overall tax rate.

gscott 6y ago

People have tried and the problem is when you want to bring the money back to use it on something. Say you setup a licensing company on an island nation that use to then charge yourself $10,000 a month to license the software you wrote... that you transferred there. Now lets say you want to buy a house and you bring back a certain amount of money. That money is taxable and that is where people mess up they don't report it. Big companies like Apple instead of bringing the money back they borrow billions of dollars at low interest rates. This lets them keep their money offshore where they invest it to make a bigger return then their interest rate on borrowing in the US. Apple also has a routine for money in the US. You will find in Nevada Apple has an investment corporation. They will do the same thing, send the ownership of software to Nevada, charge their company in some xyz state (CA) and then they use that money in Nevada to invest it for more money then it costs them to borrow. So apple is covered both ways. https://en.wikipedia.org/wiki/Braeburn_Capital#:~:text=Braeburn%20Capital%20Inc.%20is%20an,McCarran%20Boulevard%20in%20Reno https://en.wikipedia.org/wiki/Braeburn_Capital#:~:text=Braeb.... https://www.businessinsider.com/how-apple-dodges-billions-in-taxes-2012-4 https://www.businessinsider.com/how-apple-dodges-billions-in...

redis_mlc 6y ago
You're partly correct but here's an overview of what's really going on. The money is "brought back" (if it even left) into segregated accounts in the US. Most of that US off-shore money is in New York to avoid currency risks, etc. Then those accounts are used as collateral (if needed. I doubt if anybody says to Apple, "Where's your collateral?") for loans. Also, the biggest money havens in the world are 2 US states, with special privacy laws. All those guys playing games in Panama, etc. were better off just using US state tax shelters.
- demadog 6y ago
  Which states are those?
  - wolco2 6y ago
    Delaware to incorporate and East Texas to file patents?

gnicholas 6y ago

Former international tax lawyer here. This would not be possible because these benefits are largely based on international structures, and any non-US corporation owned by a few US-based individuals would be designated as a Controlled Foreign Corporation (CFC). This would prevent you from reaping the biggest benefits from a taxation perspective. The reason that publicly-traded companies are not CFCs is that a CFC must have 50% of the vote or value of the company owned by US Shareholders. "US Shareholder" is defined as a US person that owns at least 10% of the company. So even if a conglomerate is almost entirely owned by US persons, it would not be a CFC unless the US persons that own it also meet the 10% threshold. The reason for this cutoff is that the CFC rule is meant to prevent small groups of people who can actually exercise control over a foreign company from getting together and colluding to keep profits off-shore. But this is not a risk in the case of companies whose ownership is spread among many small shareholders. As a result, big companies are able to take advantage of complex international structures in ways that small groups of individuals cannot.

sooheon 6y ago
So small groups of individuals can take advantage of this given they are international enough?
- bobthepanda 6y ago
  Presumably, people who are international enough aren't being taxed by the US in the first place.
  - sooheon 6y ago
    But who would have their own government taxes to dodge.
    - gnicholas 6y ago
      Many countries do not tax their residents on a worldwide basis. So if a person from Country X earns money in Country Y, they are simply not taxed on it in Country X. They don't need to set up a complicated foreign corporate structure to avoid immediate taxation, as US residents do.

vmception 6y ago

See that’s your first problem, you think everyone has an adversarial relationship with the IRS and that’s simply not true. These structures often require a very collaborative relationship with the IRS with many things approved, elected or notified of in advance. The IRS only cares about compliance, not a hardline on actual revenue collection. The IRS has many doors for compliance.

fyfy18 6y ago

As a US citizen it's somewhat tricky as you are taxed on your worldwide income, but the easiest way is probably to become a tax resident in a country with a low tax rate. Even in the UK, as a contractor/freelancer it's fairly simple to pay single digit percent effective taxes on incomes of £100k+. And that's without even delving into what could be considered a 'tax avoidance' scheme.

C1sc0cat 6y ago
Not shure single digit effective is possible nowadays even outside IR35 - and HMRC has unliterally ruled that some professions are in side IR35 eg all it/developer contractors. Actors, film / tv professionals and lawyers etc are for the large part still treated as "self employed"