5 ms·

If you're operating a business as an individual (sole proprietor), you deduct expenses and only pay taxes on profits.

someotherperson 5y ago
Most[0] countries would still make you pay income tax for whatever you earn for your personal services and not class it as part of the business' revenue. I believe in the UK this was addressed with IR35[0] and in Australia it is called as PSI[1] [0] This loophole started being closed in the late 90s/early 00s and continues to be closed in the remaining countries that haven't yet addressed it. [1] https://en.wikipedia.org/wiki/IR35 https://en.wikipedia.org/wiki/IR35 [2] https://www.ato.gov.au/Business/Personal-services-income/ https://www.ato.gov.au/Business/Personal-services-income/
- fauigerzigerk 5y ago
  I’m not sure what this has to do with taxing revenues vs profits. Regardless of whether you provide your services through a limited company and regardless of the IR35 status of any particular contract you can always deduct business expenses from revenues before getting taxed. The purpose of IR35 is to stop people from avoiding national insurance contributions.
- midasuni 5y ago
  If you’re a business and need to pay for a car to visit customers or suppliers, that comes off pre tax. If you’re an individual and need to pay for a car to go to the office or supermarket, that’s post tax.
  - mr_toad 5y ago
    And if you use a company car for personal use, you or your employer are supposed to pay tax on that activity.
    - midasuni 5y ago
      Visiting a customer is not counted as personal use. Commuting is. Heating a home is post tax. Heating an office is pre tax.
14u2c 5y ago
I'm curious what the limits of this are. Say I create a business that receives $2000/m in contracting revenue instead of personal 1099 income. What if this business then acquires a property with a $2000/m mortgage and in turn rents that property to me for $1/mo. As all revenue is consumed by expenses would the business not be taxed? It seems like there has to be a reason why this strategy can not be used to avoid tax on all personal expenses?
- jonas21 5y ago
  Well, you're in luck! The IRS has prepared a 56-page document on just this topic [1]. The summary on page 3 is: > To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. Your particular example with free or below-market rent would almost certainly be considered tax evasion -- in fact, I believe this is one of the things that Allen Weisselberg is charged with [2]. [1] https://www.irs.gov/pub/irs-pdf/p535.pdf https://www.irs.gov/pub/irs-pdf/p535.pdf [2] https://www.bloomberg.com/news/articles/2020-11-02/trump-perks-for-weisselbergs-included-free-rent-tax-preparer https://www.bloomberg.com/news/articles/2020-11-02/trump-per...
mr_toad 5y ago
> If you're operating a business as an individual (sole proprietor), you deduct expenses and only pay taxes on profits. You can only (legally) deduct business expenses, not just all expenditure. For example (where I work) you can deduct a cost for a uniform if it’s required for work. But you can’t deduct the cost of a new suit.

Most[0] countries would still make you pay income tax for whatever you earn for your personal services and not class it as part of the business' revenue. I believe in the UK this was addressed with IR35[0] and in Australia it is called as PSI[1] [0] This loophole started being closed in the late 90s/early 00s and continues to be closed in the remaining countries that haven't yet addressed it. [1] https://en.wikipedia.org/wiki/IR35 https://en.wikipedia.org/wiki/IR35 [2] https://www.ato.gov.au/Business/Personal-services-income/ https://www.ato.gov.au/Business/Personal-services-income/

fauigerzigerk 5y ago
I’m not sure what this has to do with taxing revenues vs profits. Regardless of whether you provide your services through a limited company and regardless of the IR35 status of any particular contract you can always deduct business expenses from revenues before getting taxed. The purpose of IR35 is to stop people from avoiding national insurance contributions.
midasuni 5y ago
If you’re a business and need to pay for a car to visit customers or suppliers, that comes off pre tax. If you’re an individual and need to pay for a car to go to the office or supermarket, that’s post tax.
- mr_toad 5y ago
  And if you use a company car for personal use, you or your employer are supposed to pay tax on that activity.
  - midasuni 5y ago
    Visiting a customer is not counted as personal use. Commuting is. Heating a home is post tax. Heating an office is pre tax.

14u2c 5y ago

I'm curious what the limits of this are. Say I create a business that receives $2000/m in contracting revenue instead of personal 1099 income. What if this business then acquires a property with a $2000/m mortgage and in turn rents that property to me for $1/mo. As all revenue is consumed by expenses would the business not be taxed? It seems like there has to be a reason why this strategy can not be used to avoid tax on all personal expenses?

jonas21 5y ago
Well, you're in luck! The IRS has prepared a 56-page document on just this topic [1]. The summary on page 3 is: > To be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary. Your particular example with free or below-market rent would almost certainly be considered tax evasion -- in fact, I believe this is one of the things that Allen Weisselberg is charged with [2]. [1] https://www.irs.gov/pub/irs-pdf/p535.pdf https://www.irs.gov/pub/irs-pdf/p535.pdf [2] https://www.bloomberg.com/news/articles/2020-11-02/trump-perks-for-weisselbergs-included-free-rent-tax-preparer https://www.bloomberg.com/news/articles/2020-11-02/trump-per...

mr_toad 5y ago

> If you're operating a business as an individual (sole proprietor), you deduct expenses and only pay taxes on profits. You can only (legally) deduct business expenses, not just all expenditure. For example (where I work) you can deduct a cost for a uniform if it’s required for work. But you can’t deduct the cost of a new suit.