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I'm trying to understand how these things work. How does having the income in a business help? At some point you want to do something with the money, and then

I'm trying to understand how these things work. How does having the income in a business help? At some point you want to do something with the money, and then you have to take it out of the company and it is taxed, isn't it? Can that be avoided?

Just1689 5y ago
Not an American here but this could be related to the order in which things pay tax. If you receive 10K USD as income one month, you would pay tax on that and then be able to buy things If your business received 10K USD it could buy all sorts of things before declaring a profit and paying tax only on the profit.
- fastball 5y ago
  Sure, but you can't just classify everything as a business expense. And regardless, that's not really a carve out for the wealthy, that's just a policy we have because we think it encourages business growth, which is generally a good thing.
  - lelanthran 5y ago
    > Sure, but you can't just classify everything as a business expense. If the business is buying it, then sure you can. There's limits on this for sole proprietors as the tax authorities will argue that the businessman who bought a yacht "for the business" only ever uses it for himself. But the rich folk, who have 20% of the company (the largest share, usually), can force the company to buy a yacht where use is limited to that single shareholder ... once again proving that the rich would pay less tax than the poor.
  - llimos 5y ago
    Ok, but why can't I use the same system for my income, and deduct my essentials like rent and power and water before I pay tax on the rest?
    - sidlls 5y ago
      That's covered under the "standard deduction" in US federal taxes. I'm not saying it's fair--that deduction doesn't really cover rent in most places--but that's the intent. Basically, you can't use the same system because the tax code is rigged in favor of the wealthy.
    - sumtechguy 5y ago
      Depends on how you structure it. It also depends on how much in assets you have (many people start with a heloc). As if the market takes a dip or long term low inflation you can end up stuck. You also have to be careful not to overleverage yourself. As you can end up borrowing to pay back another loan. It is why you see 'rich movie stare declarers bankruptcy'. It is not risk free. But with discipline you can do it. Also remember you can 'own' more than one company. Perhaps one company owns 5 houses which one of those you happen to live in... Find yourself an accountant. They will show you how to set it up. It is also usually decently complex enough to be a pain to do in the day to day running of it (hence the accountant). Also up above I said 'long term low inflation' can hurt? Look at what is going on and you can figure out why suddenly we have lots of it. Think about borrowing at 2-3% and inflation is 5%.
ISL 5y ago
The article is fairly thorough on this point. Among the available strategies is taking out loans against your shares, as ProPublica asserts Ellison and Musk have done. I'm surprised at the extent to which some people appear to have mortgaged their shares. Musk, in particular. The article suggests that he has placed ~$57B of his shares out of a (net worth of ~$151B) as collateral. If TSLA begins to fall, he may face one heck of a margin-call. You'll still have to pay at some point (basis step-up aside), but the bill can be deferred or, in the case of a decrease in share value, perhaps avoided to some extent.
- tetromino_ 5y ago
  I still don't understand the scheme here. If you take out a loan against your shares, won't you have to pay back the loan (plus interest), which would still require you to eventually sell your shares and pay tax on capital gains?
  - kypro 5y ago
    Yes, but assuming your shares continue to appreciate at a faster rate than the interest you can defer any tax payments so far into the future that the amount becomes more and more insignificant due to economic inflation and capital appreciation. You're right that you still have to pay the tax, but you pay it on far more favourable terms than the average person. Of course the flip side of this is that the price of your shares collapse, but typically these secured loans are a fraction of an individuals net-worth and the risk is very low. Edit: I should add you can also time when you're taxed. So for example if taxes in the present are high you can wait then realise any profits when they're lower.
dillondoyle 5y ago
The new pass through entity deductions are HUGE and lots of loopholes even if you're one of the consultant etc categories. also this year I could get a 1:1 credit for time off for covid and covid supplies. Like not just lowering my taxable income. basic example traditional deduction take 10k off net income, if i'm taxed @20% saves me 2k. From what I could tell this was 10k off my tax bill.. like if i owed 20k it's now 10k. there's more too. i think car depreciation is better/doesn't exist if you buy personally but my car which is used for business is a tax benefit and pre-tax money I think.

Just1689 5y ago

Not an American here but this could be related to the order in which things pay tax. If you receive 10K USD as income one month, you would pay tax on that and then be able to buy things If your business received 10K USD it could buy all sorts of things before declaring a profit and paying tax only on the profit.

fastball 5y ago
Sure, but you can't just classify everything as a business expense. And regardless, that's not really a carve out for the wealthy, that's just a policy we have because we think it encourages business growth, which is generally a good thing.
- lelanthran 5y ago
  > Sure, but you can't just classify everything as a business expense. If the business is buying it, then sure you can. There's limits on this for sole proprietors as the tax authorities will argue that the businessman who bought a yacht "for the business" only ever uses it for himself. But the rich folk, who have 20% of the company (the largest share, usually), can force the company to buy a yacht where use is limited to that single shareholder ... once again proving that the rich would pay less tax than the poor.
- llimos 5y ago
  Ok, but why can't I use the same system for my income, and deduct my essentials like rent and power and water before I pay tax on the rest?
  - sidlls 5y ago
    That's covered under the "standard deduction" in US federal taxes. I'm not saying it's fair--that deduction doesn't really cover rent in most places--but that's the intent. Basically, you can't use the same system because the tax code is rigged in favor of the wealthy.
  - sumtechguy 5y ago
    Depends on how you structure it. It also depends on how much in assets you have (many people start with a heloc). As if the market takes a dip or long term low inflation you can end up stuck. You also have to be careful not to overleverage yourself. As you can end up borrowing to pay back another loan. It is why you see 'rich movie stare declarers bankruptcy'. It is not risk free. But with discipline you can do it. Also remember you can 'own' more than one company. Perhaps one company owns 5 houses which one of those you happen to live in... Find yourself an accountant. They will show you how to set it up. It is also usually decently complex enough to be a pain to do in the day to day running of it (hence the accountant). Also up above I said 'long term low inflation' can hurt? Look at what is going on and you can figure out why suddenly we have lots of it. Think about borrowing at 2-3% and inflation is 5%.

ISL 5y ago

The article is fairly thorough on this point. Among the available strategies is taking out loans against your shares, as ProPublica asserts Ellison and Musk have done. I'm surprised at the extent to which some people appear to have mortgaged their shares. Musk, in particular. The article suggests that he has placed ~$57B of his shares out of a (net worth of ~$151B) as collateral. If TSLA begins to fall, he may face one heck of a margin-call. You'll still have to pay at some point (basis step-up aside), but the bill can be deferred or, in the case of a decrease in share value, perhaps avoided to some extent.

tetromino_ 5y ago
I still don't understand the scheme here. If you take out a loan against your shares, won't you have to pay back the loan (plus interest), which would still require you to eventually sell your shares and pay tax on capital gains?
- kypro 5y ago
  Yes, but assuming your shares continue to appreciate at a faster rate than the interest you can defer any tax payments so far into the future that the amount becomes more and more insignificant due to economic inflation and capital appreciation. You're right that you still have to pay the tax, but you pay it on far more favourable terms than the average person. Of course the flip side of this is that the price of your shares collapse, but typically these secured loans are a fraction of an individuals net-worth and the risk is very low. Edit: I should add you can also time when you're taxed. So for example if taxes in the present are high you can wait then realise any profits when they're lower.

dillondoyle 5y ago

The new pass through entity deductions are HUGE and lots of loopholes even if you're one of the consultant etc categories. also this year I could get a 1:1 credit for time off for covid and covid supplies. Like not just lowering my taxable income. basic example traditional deduction take 10k off net income, if i'm taxed @20% saves me 2k. From what I could tell this was 10k off my tax bill.. like if i owed 20k it's now 10k. there's more too. i think car depreciation is better/doesn't exist if you buy personally but my car which is used for business is a tax benefit and pre-tax money I think.