yes, this definitely should be talked about. Why can't people's income be carried forward like this as well?
If i made a lot of money one year, why can't i claim away taxes from years that i didn't make income (such that my tax bracket is lower)?
There are also a lot of other ways companies get much more favorable tax treatment than people — for one thing just very fundamentally, they are taxed on profits but people are taxed on revenues, with no ability to deduct most major costs like paying rent or healthcare bills below a very high cutoff.
Kind of a tangent here but I can’t help thinking about this discrepancy when I hear about ISAs, and how people should be able to use the funding methods that companies do like selling shares in themselves. You can be a company but without any of the favorable treatment!
It definitely works against you both ways in high COL areas, where salaries are higher in part bc expenses are higher, but deductions are still fixed.
I earned €1600 in 2016 as a student and then €50k in 2017 and 2018 as I started working fulltime. So now I can make a request for 'averaging' my taxes and I now get a some money back.
I have rent and bills to pay regardless of whether I'm making money, that is the definition of making a loss.
A corporation has the same legal rights as a person, but a person has to pay more for these rights. It's unfair imho.
Personal expenses are not.
People end up paying all taxes anyway, just sometimes one or two steps removed from the legal entity/TIN who files the returns.
Let's say you run a small software company, which is a high margin business. You have $1,050,000 in revenue this year, and $500,000 in expenses, so you make $550,000.
You should be taxed on the $50,000 and the $550,000, not on the $1,050,000. Otherwise, if business expenses were not deductible, low margin and capital intensive businesses would be punished severely. We would have decreased investment in the economy and everyone would suffer for it.
If individuals could deduct their expenses, it would encourage people to spend every penny they make. The mortgage interest deduction is one example where this nudge becomes apparent (albeit real estate has merit as an investment, not just consumption). We already have a low enough savings rate as it is.
If the argument is to say "income is income", then "expenses are expenses" should apply too.
Edit: typo
It is true that there are some tax deductions that are abused. However, the effect of encouraging investment by businesses is much more important.
>If you happen to be the owner of a corp you can also use those things to your individual benefit.
This could be considered an abuse. However, the benefit of encouraging investment by businesses far outweighs the negative of this abuse. We tend to focus our attention on a few big individuals who cheat, and this excessive focus throws off our moral intuitions. Heck, the gas station owner might have deducted the cost of buying a toolbox needed at the workplace, and then borrowed a wrench from that toolbox to go home and fix his plumbing. That would be fine with me, to the extent that all the damn tax paperwork stops being worth keeping track of.
That's my point and what I was extrapolating from your high-level comment. If you're going to give an example, it's good to talk about things the gas station and software company do to reduce that income to, or below, zero. Things that can provide direct, positive, net gain impact on ownership of the corp. However, those same things are not available to employees of the corp.
To me, the rules should be the same for _any_ taxable entity.
this is exactly it. Rental costs are deducted as expenses for a corporation, but the same rental expense cannot be deducted from income. Arguably, the cost of staying alive for a person is an expense for making the income!
To make it catagorized would be too complex though - i would propose that personal income should be average-able across that person's lifetime. I.e., if i made $1000000 in one year, i should be able to spread the income from when I first started working (and paying taxes), so that my average income per year is the same number. Then you back pay all the "missing" taxes from those years, rather than suddenly jump to the $1,000,000 tax bracket and the gov't taking 45% from you in one go.
Otherwise, you end up effectively amending N returns (possibly opening them back up for examination), needing to calculate what taxes would have been due under the then-extant tax brackets and laws, possibly needing to make inflation adjustments for figures that are decades removed from the tax years in question, realistically needing to pay interest on the taxes that you didn't pay in 1972 but are now claiming are part of your 1972 income because you sold a company in 2019, and everyone would have incentive to file a tax return showing earned income from age 1. (Maybe I arrange for my child to have a job posing for photographs and being paid $20 just to get their income tax filing clock started and being able to income average all the way back to that year instead of only to age 17, 19, or 21.) Forward-only averaging avoids (or substantially avoids) those issues.
Young people would have lower rates while they’re establishing themselves, people with windfalls would end up paying rates in line with their annual compensation (instead of just maxing out the brackets with a big percentage of their income).
Also, people with sustained high income would be taxed at a much higher rate than upwardly mobile members of the middle class.
Similarly, low income people with intermittent income would have a much better chance at building their savings.
Finally, it defeats all sorts of timing strategies, so people could make major financial decisions without first hiring a cpa.
Downsides: results in a 3x income tax charge if an income earner dies suddenly (assuming you want to settle their estate in less than 5+ years). Acts as a loan from the feds to the taxpayer, resulting in income taxes due after you stop working (perhaps you became disabled or got fired [or die, as above]), and results in deferral of income tax receipts to the government during the transition.
Overall, I really like it.
Let’s say you make $100,000 a year as a school teacher in SF, and pay $7K a month for a three bedroom house for your family. That’s $84K just for housing. Food clearly uses up more than the rest.
If people and corporations were taxed the same, you could carry over the loss to a future year where your spouse cashed out some stock (or you got a job that paid a living wage).
Alternatively, we could pay everyone a fair wage, and stop subsidizing zero margin businesses that can’t afford the labor costs (which means things like gas would cost a bit more).
I’m for the latter. People have to work in these zero margin places, and their employers should figure out how to make more of a profit (and pay better), or go under.
Why should my taxes subsidize petroleum distributors, Walmart, Amazon, etc?
- I can deduct the rent for my work space. In fact, theoretically in Japanese law I can even rent an entire building and offer myself the ability to rent living space for about $150 per month, with the company eating the rest as a loss. Probably you can do something similar in other countries (although I couldn't actually do it... because in order to rent a place I need a company and in order to form a company I need an address... so... well, it didn't quite work out).
- Internet, some of my utilities, etc, etc are expenses. Some furniture as well. Some of it has to be depreciated, though, so I don't get the benefit immediately.
- I can set my salary to anything I want. If it is beneficial for the company to make a profit and for me to make peanuts, then it's fine. If the opposite is beneficial, then it's fine.
- A fair number of expenses can be deducted by having a life insurance plan for employees, etc, etc.
On the downside:
- I have to submit all my accounts using dual entry accounting. The government gets stroppy if I make a mistake because they expect me to be a corporation.
- I have to submit year end accounting. Seriously, I have no time for this and employ a wonderful tax accountant to do this for me. My tax accountant saves me money, but getting a good one is like getting a good car mechanic -- it's hit or miss and can be very expensive if you choose the wrong person.
- I have to do the payroll, calculate withholding tax, pay fees and employment taxes. I have to do this every month and if I'm late I get a really big fine. Luckily my wife does this (seriously, I would never do this without my wife doing all the heavy lifting)
- I have stupid amounts of bank fees because I have to transfer money between 3 different banks just to pay myself. We actually use a sneaker net in one phase: I literally withdraw our payroll from the ATM and deposit in another ATM just to save $20 in transfer fees. Of course, I have to document all of this so the government knows I'm not fiddling anything.
In the end, it's an absolute PITA. I don't really recommend it. I think I save a little money this way over when I was being paid salary. It's really hard to tell, though. However, if you factor in all the work that I need to do, I think I'm being paid about $2 an hour for that effort. Or I should say my wife is. If I didn't have her, it would not be worth it at all.
Couldn’t you get the building first, register as a corporation, then subsidize all following months through the corporation?
What I could do is rent a building with the corporation now and move the corporation. The problem is that you have to reincorporate the company at the new address (which would cost me about $3K). Japan is the land of bureaucracy after all! (Edit: I will likely do this if we decide to move since I'll have to pay that money anyway).
The tax break is really to accommodate companies that build a new factory and then build housing for the factory (or a house next to the factory for the owner). It's not really intended to be used the way I want to use it (to literally live in the work space).
2. Those expenses are in the furtherance of generating profits rather than for personal consumption are we really going to give people write offs for their Apple watches and $6 latte’s?
That is not a loss. That is an exchange of value; you pay $100 for your heating bill and receive $100 of heating.
A loss is when you have some value, and it disappears, and you have no compensating value. Buying a stock at $100 and selling it at $50 is a transaction in which you have less money at the end than you had at the beginning, and where you also had no compensating value exchange
Normal taxpayers do have rights to do things like carry forward losses in many circumstances. Business do get to be not taxed on expenses, but there are conditions on that. You can tell there are conditions on that because you can't just form an LLC and declare all your expenses to be losses, because you won't meet the conditions for your expenses to be losses. Note that that is the source of the problem, "form an LLC" is something you can totally do very easily, it's the failure for your personal expenses to qualify that is the problem.
While it might be emotionally satisfying to tax businesses on expenses, it's not hard to think about it a bit and realize why letting taxpayers deduct all their expenses, or trying to tax businesses on their expenses even when they didn't make a profit, are both not great ideas. (Think about the incentives created. Taxpayers don't need any more incentives to spend all their money on "expenses" as it is, if you've seen the credit card debt statistics.)
A person who works for 1 year for $100 income, then stops working the 2nd year (and live off their income from the 1st year), must pay their taxes at the $100 rate. If they are allowed the same 'carry forward' as a corp, they should pay at the tax rate of $50 for both years, rather than at $100 for the first year, and $0 at the 2nd year. And yet, this isn't allowed for a person. Of course, you could claim that the gov't can't tell that the first $100 is supposed to be 'averaged out' in the future. So would the situation be any different if you lived off savings for the first year, and replenished them in the 2nd year? I don't think this is any different.
Unless of course the company manufacturing the widgets (A) sells them to a wholly owned subsidiary (B) for a loss...then A can take the deduction.
Are you an accountant/CPA or attorney?
In lieu of penciling you a tax treatise, you may Google “wholly owned subsidiary tax strategies“. While there are no shortage of tax benefits, inevitably one of the elementary examples you find towards the top will be segregation of manufacturing and sales entities. Unfortunately you likely will not find much on more nuanced situations for example Wholly owned IC-Discs or LOB for wholly owned foreign entities (in many instances those situations can result in 0% US withholding and tax rates)
If most people feeling their way through this problem got their way, they'd simply destroy businesses entirely. They wouldn't necessarily mean to, and only a handful of people would actually appreciate that as a result, with even fewer of those would appreciate it after ten years of experiencing it, but it would be the result.
This is a thing that has happened, and can be studied in history, and is actually happening in the world right now; countries have destroyed their entire business base for good, feel-worthy reasons. Generally speaking, most people have not liked the results. It is not a thing that is beyond the pale, or impossible to happen, or can't happen here, so it's worth encouraging people to be more careful than just feeling.
(This is more opinion than the above, but I don't really believe in the existence of "businesses that aren't taxed", because the business is non-trivially responsible for all of the income tax their employees generate, and directly pay Social Security, health care taxes, sales tax on all the things they buy, and so on. It isn't really the case that there are companies that reach the end of their fiscal year and not a single dollar was "paid in taxes". All it is is that they aren't necessarily paying income taxes, one particular tax, in a field full of lots and lots of taxes. The idea that "companies aren't being taxed" is a lot of rhetoric, which isn't intrinsically a problem, but it can be very misleading and lead to emotions not well-calibrated with reality. By this standard, there's actually a lot of Americans who "don't pay taxes" too, which really makes it all seem a great deal less unfair, and even pay negative taxes, but they still pay various taxes even so, because income is only one taxation element.)
It pits everyone against each other to make sure someone else gives more money to the same entity
Fascinating
Theoretically, this is appealing - practically, I see a lot of problems