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If you reinvest your profits into your own business that money usually gets charged as a expense on the income statement so your reported gross profit reduces b

by slykat 13y ago

If you reinvest your profits into your own business that money usually gets charged as a expense on the income statement so your reported gross profit reduces by that amount and thus, you don't pay taxes on that amount. For example, lets say Company XYZ anticipates making $100M in gross profits but decides to invest $100M in R&D for a new product. Their reported gross profit would be $0M for the year due to the $100M charge.

reedlaw 13y ago
Is there anything analogous for personal income? That is, can I invest my income in such a way that my gross income is $0 for the year? I know mortgages are deductible, as well certain retirement savings accounts, but what about daily living expenses? It seems a tad unfair that corporations can effectively evade taxation while individuals cannot. Or is that by design because corporate spending trickles down to individuals' salaries?
- dragonwriter 13y ago
  In theory, the basic exemptions for each dependent (including, for independent taxpayers, the taxpayer the self) serve a loosely analogous role. But yes, businesses are treated somewhat differently (but mostly it's businesses, not corporations; an individual with business income and expenses can do the same as a corporation, at least to offset business income -- I forget whether business losses that exceed business income apply against other income, though ISTR they do and that's a key difference between hobby expenses (which can only offset hobby income) and business expenses.
- jacques_chester 13y ago
  Generally, no. The key difference between personal and corporate tax in most countries is that personal tax is conceptually taxed first, after which you can spend what's left. But a corporation gets to spend first, after which taxes are levied on whatever remains. Unlike you or I, if a company makes no profits, it pays no tax on its income. The basic reason is because income is seen as distinct from profit. If personal income taxes were based on a profit-like model, you would require everyone in a country to keep double-entry books on every transaction they made. That is unlikely to be a very popular policy. I am not an accountant, this is not financial advice.

by slykat 13y ago

reedlaw 13y ago

Is there anything analogous for personal income? That is, can I invest my income in such a way that my gross income is $0 for the year? I know mortgages are deductible, as well certain retirement savings accounts, but what about daily living expenses? It seems a tad unfair that corporations can effectively evade taxation while individuals cannot. Or is that by design because corporate spending trickles down to individuals' salaries?

dragonwriter 13y ago
In theory, the basic exemptions for each dependent (including, for independent taxpayers, the taxpayer the self) serve a loosely analogous role. But yes, businesses are treated somewhat differently (but mostly it's businesses, not corporations; an individual with business income and expenses can do the same as a corporation, at least to offset business income -- I forget whether business losses that exceed business income apply against other income, though ISTR they do and that's a key difference between hobby expenses (which can only offset hobby income) and business expenses.
jacques_chester 13y ago
Generally, no. The key difference between personal and corporate tax in most countries is that personal tax is conceptually taxed first, after which you can spend what's left. But a corporation gets to spend first, after which taxes are levied on whatever remains. Unlike you or I, if a company makes no profits, it pays no tax on its income. The basic reason is because income is seen as distinct from profit. If personal income taxes were based on a profit-like model, you would require everyone in a country to keep double-entry books on every transaction they made. That is unlikely to be a very popular policy. I am not an accountant, this is not financial advice.