Tag: tax returns

On Taxes and Businesses

I expect a lot of hype about how little Trump paid in taxes — and, yeah, it really sucks that someone is able consider private planes, meals, club memberships, car leases, etc to be a tax-deductible business expense. One of my first introductions to the working world was a privately-held company. I was the IT department, and one of my jobs was to move data from the old systems (mainframe for order management, database for inventory, and paper ledger for accounting) into the new all-in-one business management platform. Which meant I not only had access to all of the company’s accounting, but that I had to read through it all to get the information typed into the new platform. The company owner’s plane was owned by the business, so the hangar and maintenance was a business expense. He’d hire time in the plane for person use, but he got a really good discount from his company’s transportation service. Same for the company car he drove. And the country club membership — that’s where he’d meet with clients to solicit business, after all. Food and drink at those client meetings were business expenses too. It was all perfectly legal and designed both to maximize the owner’s enjoyment of life and the minimize the business’s profits. As a broke out-of-college kid, it seemed awfully unfair that the rich old dude was able to eat every day and avoid paying some taxes in doing so but the huge chunk of my paycheque that went to various taxes meant I had some rice to eat that day.

There were subordinate companies that paid consulting fees back to the main company to zero out any profits they made. And that parent company had a bunch of “business expenses” that minimized their profits. Ideally, the CFO told me, you’d net zero every year (or even have a paper loss) and not have to send the federal government anything in business taxes. Which I get — people shop around for the best price, find coupons and promo codes … you try to get the best deal. And, if the legal structure allows you to do so, why wouldn’t you avoid paying taxes altogether?

I’ve heard people say that a business needs to show a profit every ten years — that’s not true. If you don’t show a profit once in a ten year period, you may be asked to prove to the IRS that it’s a legit business. I come across this in the soap-making community — buying stuff for my soap-making hobby is not tax deductible even if I construct a business entity under which to make those purchase. Even if I happen to sell a few bars of soap to friends and neighbors. But if you’re advertising your product, going out to craft fairs and selling your soap … you provide the IRS evidence of your attempts to sell your product and you could be losing money every year for decades and still write off business expenses.

And the tax code is designed to encourage businesses to minimize their net — investing in your business offsets profit too. It’s one of the biggest problems I had with the interaction Obama had with Joe the not-a-plumber. If you buy a plumbing business that grosses a million dollars a year? You hire another plumber, buy another truck … you invest in a new tool that lets you offer more services. You spend some of that money and don’t have to pay taxes on it. Well, that hiring and purchasing also improves the country’s economy.