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Can someone ELI5, what entities or convoluted mechanisms or businesses do very rich people create / have access to that they can minimize taxes, which the rest

Can someone ELI5, what entities or convoluted mechanisms or businesses do very rich people create / have access to that they can minimize taxes, which the rest of us simply cannot take advantage of here in regular life?

sumtechguy 5y ago
You can have the same tools but not necessarily the same connections. The issue is usually capital. Most people do not have it. For example take Paris Hilton. When she had her DUI a few years ago her 500k car got repo'd. Wah? She stopped making payments on it. Payments?! Because she probably had it going through some business expense structure and was probably literally writing off the interest and payments. More than likely the original money was borrowed against an existing capital asset. If the sale price of the car did not make up the difference they had to come up with whatever cash was left over. Like most repos. But in this case it was a fairly flashy car that held its value decently well. So they probably took a small loss. But there was never any real risk to owning it. Think of getting a HELEOC but running everything through that type of borrowing structure. But since you 'know a guy' you get the super awesome low interest rates. Which are business expenses. That flashy show of hers was a way to write a bunch of stuff off. Everything is an expense and a way to write it off your taxes. In some cases it does not even affect your taxes if you bury it in another company that is doing something similar that you control 100% of and just happens to be in a lower tax bracket. But gave you a sweetheart deal of leasing a yacht for a small amount per year for being such a good customer!
- Ekaros 5y ago
  Also in some cases with cars by my understanding leasing makes lot more sense than buying. Like Rolls Royces where lease payments might be lower than depreciation. So do you actually buy this thing, or just the use of it. When later might overall be cheaper. It's get bit weird with some commodities.
  - sumtechguy 5y ago
    Good point. Cars are not really a good asset except in very special cases. I should have probably picked a better example. They will many times borrow against an existing asset to basically buy/grow another asset. The 'fluff' is usually for tax writeoff if they can.
- atweiden 5y ago
  See also: non-profit hijinks, e.g. individually managed funds and supporting organizations. With enough upfront capital and some administrative legwork, tax-free wealth management turns into “philanthropy”.
eli 5y ago
This paper is mostly about tax fraud. It's "tax minimization" in the same sense that you can get as job that pays cash and you don't declare the income.
charlesdm 5y ago
Depends on your citizenship. If you hold non US citizenship, it is generally easy to avoid most taxes by physically relocating to a tax haven (low or no tax). But that is perfectly legal, not fraud.
- eli 5y ago
  If people genuinely reside in these places they wouldn't need the shell companies and bank secrecy described in the paper. I don't have a problem with someone moving to a low-tax jurisdiction in order to get lower taxes, but I think that is really the exception.
- dathinab 5y ago
  > But that is perfectly legal, not fraud. Except if you don't actually relocate there, in which case it's fraud.

sumtechguy 5y ago

You can have the same tools but not necessarily the same connections. The issue is usually capital. Most people do not have it. For example take Paris Hilton. When she had her DUI a few years ago her 500k car got repo'd. Wah? She stopped making payments on it. Payments?! Because she probably had it going through some business expense structure and was probably literally writing off the interest and payments. More than likely the original money was borrowed against an existing capital asset. If the sale price of the car did not make up the difference they had to come up with whatever cash was left over. Like most repos. But in this case it was a fairly flashy car that held its value decently well. So they probably took a small loss. But there was never any real risk to owning it. Think of getting a HELEOC but running everything through that type of borrowing structure. But since you 'know a guy' you get the super awesome low interest rates. Which are business expenses. That flashy show of hers was a way to write a bunch of stuff off. Everything is an expense and a way to write it off your taxes. In some cases it does not even affect your taxes if you bury it in another company that is doing something similar that you control 100% of and just happens to be in a lower tax bracket. But gave you a sweetheart deal of leasing a yacht for a small amount per year for being such a good customer!

Ekaros 5y ago
Also in some cases with cars by my understanding leasing makes lot more sense than buying. Like Rolls Royces where lease payments might be lower than depreciation. So do you actually buy this thing, or just the use of it. When later might overall be cheaper. It's get bit weird with some commodities.
- sumtechguy 5y ago
  Good point. Cars are not really a good asset except in very special cases. I should have probably picked a better example. They will many times borrow against an existing asset to basically buy/grow another asset. The 'fluff' is usually for tax writeoff if they can.
atweiden 5y ago
See also: non-profit hijinks, e.g. individually managed funds and supporting organizations. With enough upfront capital and some administrative legwork, tax-free wealth management turns into “philanthropy”.

eli 5y ago

This paper is mostly about tax fraud. It's "tax minimization" in the same sense that you can get as job that pays cash and you don't declare the income.

charlesdm 5y ago

Depends on your citizenship. If you hold non US citizenship, it is generally easy to avoid most taxes by physically relocating to a tax haven (low or no tax). But that is perfectly legal, not fraud.

eli 5y ago
If people genuinely reside in these places they wouldn't need the shell companies and bank secrecy described in the paper. I don't have a problem with someone moving to a low-tax jurisdiction in order to get lower taxes, but I think that is really the exception.
dathinab 5y ago
> But that is perfectly legal, not fraud. Except if you don't actually relocate there, in which case it's fraud.