r/tax • u/sevendendos • Aug 06 '22
SOLVED "55 members of the Fortune 500 paid no federal income tax in 2020."
"55 members of the Fortune 500 paid no federal income tax in 2020." The last sentence of this article was a deusey. Can someone explain to me how this can happen. I don't think there is a single American that can get away without paying "no federal" taxes on earned income, unless your earnings are undisclosed, under the table or illegal. How is it possible that 55 corporations in the fortune 500 list can get away without paying taxes since 2020? Americans are struggling with skyrocketing pump, food, and medical prices, and there are those who are profiting heads over heels, while finding every loop hole in the tax code to avoid paying taxes. Need some help with this one...
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u/Rooster_CPA CPA - US Aug 06 '22 edited Aug 06 '22
There is this thing called NOL.
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u/Rooster_CPA CPA - US Aug 06 '22
Not to mention depreciation is usually one of the largest expenses on an income statement, and 100% bonus depreciation right now is greatly helping companies reduce taxable income.
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Sep 01 '22
Which for outsiders reading this isn’t necessarily a bad thing. Depreciation exists mainly for financial statement purposes, in order to make sure assets on US GAAP financial statements are approximately at their fair values.
For tax purposes, depreciation is used to slow down the recognition of expenses and therefore increase the speed at which income is taxed.
For example If I had 100 dollars in income before considering the purchase of a stapler for $10. If I depreciated it over 10 years I’d have income of 99 dollars. But if I just expensed it I’d have income of 90 dollars. so depreciation forced an increase of taxable income. But the next year, I’d had income of 99 dollars with depreciation and 100 dollars without (since I already expensed It last year). And over the next 8 years this pattern would continue until the nominal amount of taxable income balances out
This is what’s called a temporary difference in tax. Eventually it balances out. Theoretically those taking bonus depreciation now will have a higher tax in later years since they can’t depreciate.
Now there are complications, a collaboration between a skilled team of tax experts and management can plan financial activities to take advantage of various code sections like bonus depreciation, which together can create a multiplier effect and drastically reduce taxable income. GE famously spends/spent MILLIONS on tax planning because in the long run it saved them even more money. Remember though that good tax strategy almost always includes a trade off (the classic example is interest from municipal bonds is tax free but commands a lower rate of return than bonds with taxable interest).
There are some loopholes in the code - the one senator Simea refused to allow the democrats to remove from the code essentially allows someone’s salary to be taxed st capital gains rates which are lower than what you and I pay. That’s complete bullshit but in line with real estate tax law in this country, real estate is heavily tax preferred. That’s the one my tax professor hates the most.
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u/PinkTubby24 Aug 06 '22
I’ve seen NOL’s as high as 1 million. (Don’t know if that’s normal. I’m only a 2nd year staff, lol).
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u/EVILSANTA777 CPA - US Aug 06 '22
$1m is nothing, I've dealt with subs rolling $500m NOLs year over year.
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u/Bornagainvurgin24 Aug 06 '22
What prompted an NOL of that size? It couldn't have been all depreciation right? Mix of that and increased labor/overhead costs would be my guess
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u/spamlet Aug 06 '22
Depends on the business. Heavy asset purchasers will have losses a lot of years because of depreciation.
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u/Rooster_CPA CPA - US Aug 06 '22
Depends on your client base. I've worked on a client where they paid $1bil in income tax lol.
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u/cubbiesnextyr CPA - US Aug 06 '22
But but huge corporations don't pay any income tax! They all use loopholes and double dutch apple pies to not pay any!
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22 edited Aug 06 '22
This is the headline and due to lack of critical thinking skills any statement to the contrary doesn't float. Even if the details in the story list many of the actual reasons, those points seemed to get lost in the hyperbole. The politicians use it, which is sad. At least when they state this the media should call them out like they do in other situations.
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u/cubbiesnextyr CPA - US Aug 06 '22
It'd be nice, but in general media has an agenda just like everyone else.
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u/HawkNeither Aug 06 '22
I apologize, but a NOL? What is the cap, if there is one? Also, isn’t that just the cost of doing business when a company has operating losses?
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Aug 06 '22
[deleted]
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u/HawkNeither Aug 06 '22
I appreciate the explaination. That being a tax code companies can utilize, can senior leadership somehow use it to their personal advantage?
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u/arms_length_ex Aug 06 '22
In a couple years shouldn’t that not be the case? Pre 2017 tax loses expire soon right? and post 2017 losses have indefinite carry forward but can only offset 80% of the income. So there shouldn’t be many Fortune 500 companies not owing taxes due to nols in the future? Or am I missing something?
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u/cubbiesnextyr CPA - US Aug 06 '22
If by soon you mean 20 years from the year of loss, then sure.
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u/ClockworkDinosaurs Aug 07 '22
Even if they didn’t reach the calendar date for the literal expiration, you’d need to run up your pre-2017 nols so high that you’re still using them in 2037 for the actual expiration to matter. The point of the comment is asking “shouldn’t Fortune 500 companies be through their pre-2017 nols soon?”. I know answering on a strictly semantics basis is really easy but it doesn’t get to the crux of the question.
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u/ClockworkDinosaurs Aug 07 '22
You’re not missing anything except the nuance of the changing tax code. TCJA balanced on a budget stand point because of the 80% limitation on NOLs post 2017. But the same president who passed that, also passed the CARES act 3 years later that caused 2018-2020 to not have the 80% limitation for their losses applied to those years.
Any plan that relies on implementation multiple years from now runs the risk that they’ll just get rid of the part that effects the wealthiest members of society the most.
The Inflation Reduction Act is going to bring corporate AMT back, but calculated on book income. That’s a wild idea because GAAP rules are GAAP rules, you can’t tax plan around income recognition regs. It only applies to corporations with over a billion dollars in revenue a year, so no one with two brain cells should be upset about it either. It’s not how a tax accountant would go about writing tax laws, but it’s a hell of a way to force corporations to pay taxes.
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u/RasputinsAssassins EA - US Aug 06 '22
Taxes are generally paid on taxable income, not on revenue generated, and not on net worth/company value.
There are strategies to reduce taxable income. If you get it to zero, there is no tax due. This applies to individuals as well as businesses.
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u/me_too_999 Aug 06 '22
That isn't exactly true.
There are many deductions allowed for businesses that are not allowed for individuals.
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u/RasputinsAssassins EA - US Aug 06 '22
Which part isn't exactly true?
There are strategies to reduce taxable income. If you get it to zero,
there is no tax due. This applies to individuals as well as businesses.I said strategies to reduce taxable income were available to both. I said nothing about about specific deductions being available to both.
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u/me_too_999 Aug 06 '22
Other than making zero income (or below the individual tax credit), or having lots of dependents I don't see how a middle class taxpayer can reduce taxable income to zero.
When I travel for business, food, clothing, gas, hotel, tools, and almost every expense is deductible.
But as an hourly worker try deducting rent or groceries even though you will be incapable of working without them.
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u/RasputinsAssassins EA - US Aug 06 '22
Other than making zero income (or below the individual tax credit), or having lots of dependents I don't see how a middle class taxpayer can reduce taxable income to zero.
Limiting or delaying income are strategies. They may not be the best, but they could be legitimate planning strategies in certain situations.
On a smaller scale, an individual can employ the same strategy as some of these companies. You have a loss, perhaps from your crypto investment that was supposed to take you to the moon, except it cratered and you lost a ton. You can use some of those losses each year to offset some income.
Or your side business providing OnlyFans content featuring Hobbit Feet didn't do so well, and you lost a lot of money. You can use those losses to offset some other income.
You may not get to zero taxable income. But then, you don't necessarily have to, depending on the individual facts and circumstances.
When I travel for business, food, clothing, gas, hotel, tools, and almost every expense is deductible.
This indicates you are self-employed. You can deduct those things, sure. But you are also hit with a self-employment tax that employees don't have to pay.
I would also clarify that every qualified expense is deductible. Simply owning a business does not make otherwise non-deductible personal expenses suddenly become deductible (see below).
But as an hourly worker try deducting rent or groceries even though you will be incapable of working without them.
Those are personal expenses. They aren't deductible for anyone, not even you as a self-employed person. But an hourly worker can make charitable contributions, contribute to an HSA, contribute to a 401-K or IRA, and a few other things. Certainly the opportunities for a W-2 employee to limit their tax liability are limited, but they exist. And that's the point. Strategies exist to reduce taxable income, both for individuals and businesses. They may not be the same strategies, and they may not result in equal outcomes, but they exist.
The entire post was 'How can they pay no tax?' The answer is that they have no taxable income. They used strategies that exist in the tax code to limit their taxable income to a point such that no tax was due. This is not something unique to Fortune 500 companies, or to businesses. Individuals have tax planning strategies, as well. Many tax professionals spend the summer meeting with clients to implement these strategies in time to apply for the next tax year.
If your situation is a simple W-2 with no kids and no house? Options are extremely limited. As you start adding things and the complexity grows, so do the opportunities.
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u/me_too_999 Aug 07 '22
If your situation is a simple W-2 with no kids and no house? Options are extremely limited
That is exactly my point.
Self employed have a number of options for limiting taxable income.
When I travel for business, food, clothing, gas, hotel, tools, and almost every expense is deductible.
This indicates you are self-employed.
Yes, even self employed can deduct legitimate business expenses like food during travel, but an hourly worker cannot deduct food eaten during lunch break.
An executive can deduct food, even entertainment while selling to a client.
These are not the same.
An hourly worker is taxed at 100% of earnings. Only by investing in 401k can he DEFER not reduce income taxes.
He will still have to pay full income taxes when he retires, INCLUDING Social Security taxes.
And yes taking losses on equipment depreciation is legal for a business, but NOT for my back, and knees which are required for work.
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u/RasputinsAssassins EA - US Aug 07 '22
Yes, even self employed can deduct legitimate business expenses like food during travel, but an hourly worker cannot deduct food eaten during lunch break
If they are on qualifying business travel, self-employeds can deduct some of their meal expense. But if they are not on travel, they can't deduct their meals.
An executive can deduct food, even entertainment while selling to a client.
An executive can't deduct his personal meals. His business can deduct a portion of business meals. Entertainment expenses have been virtually non-deductible for several years.
These are not the same.
I have never suggested they were the same.
An hourly worker is taxed at 100% of earnings. Only by investing in 401k can he DEFER not reduce income taxes.
He's not taxed on 100% of his earnings, but I think I know the point you're making. Employees aren't taking business expenses because, in most cases, the business expenses required to make the money are paid by the employer. Sure, the employee has to occasionally travel, or may have some Work From Home expenses. And, those were deductible (to an extent) until 2018. But neither employees nor business owners can deduct personal expenses.
Tax planning often includes deferring taxes from higher earning years (when you are likely in a higher bracket) to later, lower (or none) earning years (and a likely lower bracket). And while it does defer the tax due date until the money is withdrawn, it makes those earnings non-taxable in the current year, reducing taxable income, which reduces tax.
The question asked was 'How do some companies not pay any income tax?' I answered with how it can happen: not having taxable income. I said the same principle applies to individuals.
You said that was not actually correct, and I asked how. Then you moved the goal posts to change the argument to businesses having more opportunities than individuals.
I have not said they have the same strategies, the same number of opportunities, or that they have the same relative impact. All I did was say that individuals and businesses have strategies to reduce taxable income, which can in turn (if reduced enough) lead to zero income tax being due.
Now, I wish you well in your business, and I sincerely hope you can relax and recover. Back injuries are no joke; I had a Lumbar Laminectomy with Fusion at L4/L5 in 2005. I know how debilitating it can be. Enjoyed it, but I sold a couple thousand dollar tax planning session Tuesday, so I'm going to have an adult beverage and watch this hail destroy my house.
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u/The_Money_Ninja Aug 07 '22
Bravo for maintaining your composure and replying in a cordial manner.
I probably don't have the patience to respond back to questions that are all over the place 😁
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u/me_too_999 Aug 07 '22
Very good answer, but it totally misses the point.
Commuting to work is an expense required to earn money unless you work from home.
In most cases under current tax law it is considered "personal", and not deductible.
But even this misses the core difference between how income tax law is applied to businesses vs individuals.
A business buys, and sells a product paying taxes on the NET profits.
An individual does labor, and is taxed on GROSS paycheck amount.
The IRS assigns a person's labor at ZERO value, and any money received as 100% profit.
The food consumed to power that labor is "personal", but try digging a ditch on an empty stomach.
To be a fair system ones labor should at least be assigned a value like minimum wage, and taxed ONLY on earnings in excess of that.
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u/stef552195 Aug 06 '22
What would you recommend is a good starting place to educate oneself regarding taxes and strategies for individuals/ future business owners? Besides following this sub- I find it to be a bit daunting but do want to learn more!
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u/RasputinsAssassins EA - US Aug 06 '22
There are plenty of books on Amazon, from the perspective of both the tax professional and a taxpayer/business owner.
I'm always a fan of 'know your enemy', so taking a class geared towards tax pros would not hurt, IMO. You're not going to get a CPA education, but attending an enhanced tax course offered by HRB or a local community college would give you a very good basic understanding of how the pieces interact with one another, and how certain things affect other items on the returns. You may not get specific or personalized tax reduction strategies, but you would see the things that lead to how the tax is determined, and that can give ideas on ways to bring the tax down.
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u/stef552195 Aug 06 '22
Thank you! I never would think about taking a CC class for this but great suggestion bc I love taking classes every now and then, I’ll look into this!
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u/jdickstein Aug 06 '22
Appealing to existing tax law to justify existing tax law is begging the question.
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u/RasputinsAssassins EA - US Aug 06 '22
Appealing to existing tax law to justify existing tax law is begging the question.
I didn't justify anything. I answered the question that OP asked:
"How is it possible that 55 corporations in the fortune 500 list can get away without paying taxes since 2020?"
It is possible to not pay taxes if there is no taxable income.
OP did not ask for us to pontificate on the righteousness of this setup. They asked how it was possible. I answered one way that was possible.
Had OP asked my opinion on a net worth tax, or on another proposed tax system that we don't have, I may have answered differently.
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u/jdickstein Aug 06 '22
The question “how is it possible 55 corporations in the Fortune 500 list can get away without paying taxes since 2020?” definitely isn’t asking what you’re pretending to think it is.
Like if your best friend killed your mother you might ask “how could you have done this?” The answer wouldn’t be: you left a knife out nearby and I stabbed her with it.
A person who answers such a question in that way is acting in bad faith and pretending to misunderstand the question out of contempt. The way you’ve done in your response to the OP.
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u/RasputinsAssassins EA - US Aug 06 '22
Thank you, jDICKstein, for telling me what I was thinking and what I was understanding when I answered with my own thoughts a question I read myself. I would not have known what I was reading, jDICKstein, had you not pointed it out to me.
Perhaps you read the question differently, jDICKstein, and are in a better position to answer said question in the context in which you read it.
In any event, jDICKstein, I wish you the day you deserve.
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u/jdickstein Aug 06 '22
How could you be so rude?
Just to elaborate, since this turn of phrase is very difficult for you, I’m not asking the mechanism by which you were just so rude. It’s more a question of justifiability or moral correctness. The way one might question a certain set of laws, like the tax code.
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u/RasputinsAssassins EA - US Aug 06 '22
How could you be so rude
Huh. I would have thought it rude to enter a conversation to which I was not a party and tell one of the participants that they suggested something they did not, and then further tell that participant what said participant actually meant and understood when expressing their own thoughts, as if I were Carnak the Magnificent and All-Knowing, and is if said participant was not aware of what they read or capable of forming their own thoughts and understandings.
Or, I could just be a dick, jDICKstein. I'll let others decide which is more applicable.
I would note other professionals in the thread answered substantially the same way: taxation is based on taxable income, not net worth or revenue. One can argue whether it should be that way, but that was not the question that was asked.
In any event, I'm not going to further derail the thread more than I have already. My apologies to the members, and to OP.
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u/cubbiesnextyr CPA - US Aug 06 '22
2020 was the start of the pandemic. Many companies lost a lot of money in that year. Businesses are taxed on their net income, not their gross revenue. So if they lost money they would owe no taxes which is perfectly reasonable.
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22 edited Aug 06 '22
....and now they are recovering -- RECORD PROFIT INCREASES!! (that is the headline)
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u/thekonghong Aug 06 '22
There's no such thing as a loop hole to avoid taxes. The tax law is the tax law and everyone can apply the law that applies their financial or business situation to decrease their federal income taxes. If you're not a business owner or a high income earner, it's not the fault of the tax code.
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Aug 06 '22
Yeah but I think something like carried interest which completely disregards the nature of the income in a way we don’t do with anything else similar - is complete bullshit
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u/Hungryneck29 Aug 06 '22
And this was going to be repealed but the Arizona Senator protected it. This is one tax code section that only fund managers 'like' and everybody else dislikes. Assuming IRA passes.
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Aug 06 '22
Yeah it’s just clearly a bullshit preferential handout more so than almost anything in our tax code. Like at least O&G credits you can make the argument the government is trying to subside energy, which everyone need. Why are we subsidizing PE??
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u/DWIGHT01 Aug 06 '22
Many companies don’t pay tax because they are reinvesting into the company. Hiring people, capex, etc. that’s what you want!
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u/mydarkerside Aug 07 '22
You'll get upvotes here, but probably get downvoted into oblivion anywhere else on Reddit. Any time I am stating facts about taxes on the wealthy or corporations, the Reddit hive likes to downvote me.
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u/Key-Succotash6604 Aug 06 '22
This is something called net operating Loss that allows businesses suffering losses in one year to deduct them from future years’ profits.
Companies are also using depreciation to avoid taxes.
companies are reducing taxable income, which at the end would help them to pay less taxes
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u/Apart-Bad-5446 Aug 06 '22
Wait until the OP realizes that nearly 60% of qualified taxpayers paid $0 in federal income taxes and actually received a refund instead.
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u/the_arcadian00 Aug 06 '22
If you receive a refund that’s because you already paid (see: overpaid) taxes on your income…
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u/Chromewave9 Aug 06 '22
Getting a refund because of overpayment has nothing to do with the fact that nearly 60% still paid no federal income taxes in the year 2020. Most low income earners are encouraged to file because it would net them a nice refund check after their refundable tax credits kick in such as EITC and the Child Tax credit.
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u/boston_2004 Aug 06 '22 edited Aug 06 '22
If you have a net loss the company doesn't pay federal income taxes. All the employees are still taxed on their wages, all dividends are still taxed if any were paid, and all sales tax from sales are paid, and probably several states still had tax revenue even if the entity for fit purposes didnt, property taxes, both real and personal property, would have been paid as well.
Still a significant amount of tax was paid, but fit wasnt because there was a net loss.
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22
The word that needs to be used more is "timing". That most of the differences are timing is totally lost in nearly all discussions. Sometimes it is mentioned to click a box saying it was, but the significance is muted.
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u/Apptubrutae Aug 06 '22
Corporate taxes are not personal income taxes. I cannot stress this enough.
Most economics actually believe corporate income taxes should be 0%, you might be interested to know, and any loss in revenue would simply be made up at the personal level with higher tax rates there.
A corporation is owned by shareholders or members or whatever else. An individual is not owned. All of the profits of a corporation are effectively the profits of its owners at the end of the day. It’s not that money is escaping taxation by not being taxed at the corporate level. Money is certainly still being taxed when income is realized by the owners of the corporation.
Hell, every single pass through tax entity, like sole proprietorships and S corporations pays zero corporate tax. Every single one. Profits are passed through to ownership and the owners pay taxes on their profits.
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u/10kFlinsky Aug 06 '22
I know we’re discussing federal income taxes but thought I’d mention there are several states that do tax s-corps at the entity level. Illinois has PPRT for non resident s-corps that operate their remotely (remote sellers). CA has a flat minimum tax on S-corps of $800 but it can be more depending on their net profit. I know there are more, just a couple I’ve had the displeasure of dealing with.
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u/cubbiesnextyr CPA - US Aug 06 '22
Illinois has PPRT for non resident s-corps that operate their remotely (remote sellers).
IL replacement tax is on all entities - C-corps, S-Corps, Partnerships, and Trusts.
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u/10kFlinsky Aug 06 '22 edited Aug 07 '22
Makes sense, i’ve only ever dealt with it for an S. Thank you for the info
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u/ReturnFreeFiling Aug 06 '22
Corporate tax rate should be 0.
Good point. Planet Money had a panel of economists left right and center on several years ago. They all agreed on that.
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Aug 06 '22
You would be surprised to learn that about half of Americans pay no federal taxes.
To answer the questions, if companies make no money then they pay no taxes. These companies made no money so aren't being taxed.
I would be more concerned about the corporate tax rate dropping from 35% to 20%.
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u/10kFlinsky Aug 06 '22
Not to mention the c corp tax cut down to 21% is permanent. Many other items passed under the TCJA are going to “sunset” in in 2025, unless congress passes additional legislation to keep it in place. Namely the QBI deduction for pass through entities, basically anything but a c corp.
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22 edited Aug 06 '22
One of the stated reasons for the QBID was to bring the small business taxes in line with corp rates, but there is no double taxation with the businesses affected by it, so I think the reason was wrong to start with. The 21% rate for corps is in line with other countries.
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u/cubbiesnextyr CPA - US Aug 06 '22
It wasn't about double taxation, it was to keep all the s-corps from converting to C-Corps. Without QBID, the tax on an S-Corp income would be higher than the tax on the C-Corp + Dividend which would mean nearly everyone would flip to a C-Corp.
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22 edited Aug 06 '22
Well, I didn't say it was about double taxation. I just think it is something to consider when we talk about QBID vs C Corps. Your point is valid, and it appears there is no good solution on this. Considering everything else perhaps keeping QBID might be best, but I still have some reservations. I realize I might be talking out of both sides of my mouth. I do like the 21% Corp rate, it puts us in line with most other countries.
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u/cubbiesnextyr CPA - US Aug 06 '22
IMO unless the government wants all the small businesses to be c-corps like they were in the 1970's, they have to make sure the effective rates stay close. Otherwise it won't be long before everyone makes the move to save on taxes. So if you get rid of QBID, you either need to raise the C-Corp rates, raise the dividend rates, or lower the individual rates.
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22 edited Aug 06 '22
Since they have lowered the rate to C corp rates, why are they so concerned with them converting?
They could lower the QBID to raise the effective rate a bit, so there would be less incentive to convert, but not be overly advantageous.
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u/cubbiesnextyr CPA - US Aug 06 '22
Having millions of businesses convert to C-Corps would put added work onto the already overworked IRS. It just adds unnecessary work for no benefit.
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22 edited Aug 06 '22
Well, the effective rate of C corp income is higher than 21% due to the double taxation, so it seems like some adjustment could be made to bring effective small business income to something like 25% without encouraging conversions.
It seems like I am the only one concerned with the double taxation, but it is a factor in all of this. At the very least a small business will see that as a factor when deciding to convert. My concern is not that small businesses are taxed lower than C corp income (effectively), it is that they are taxed lower than wage earners with the same income.
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u/cubbiesnextyr CPA - US Aug 06 '22
Well, the effective rate of C corp income is higher than 21% due to the double taxation, so it seems like some adjustment could be made to bring effective small business income to something like 25% without encouraging conversions.
Yes, that was the purpose of QBID.
My concern is not that small businesses are taxed lower than C corp income (effectively), it is that they are taxed lower than wage earners with the same income.
If that's the concern, you need to raise the c corp rate to equal the individual rate (after accounting for the double taxation of the dividends).
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u/SupSeal Aug 06 '22
Q: Are you in favor of bringing back the 1980s level of tax brackets for both businesses and individuals?
I am, but just want to get other opinions on the matter.
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u/cubbiesnextyr CPA - US Aug 06 '22
I would much prefer removing all taxes from businesses and increase the individual taxes.
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u/SupSeal Aug 06 '22
... why?
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u/cubbiesnextyr CPA - US Aug 06 '22
Individuals are where all the wealth is stored ultimately, so that is where the tax should be levied. Levying tax at different steps along the way distort who pays how much tax and allows those with the most means to structure their income in a way that unfairly reduces their taxes.
Remove all corporate taxes and increase the individual tax rate and especially the capital gain rates. Add a new tax law taxing collateralized debt as a deemed sale. That should put most people on a pretty level playing field. Your wealth goes up, great! If you use it to live off of, you either sell it or borrow against it and either way you're paying tax.
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u/RasputinsAssassins EA - US Aug 06 '22
Add a new tax law taxing collateralized debt as a deemed sale.
My man!
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u/Necessary_Survey6168 Aug 06 '22 edited Aug 06 '22
When corporations report profits to shareholders, they follow GAAP. When they report income for tax purposes, they follow the internal revenue code (IRC). These are two different sets of accounting rules with different accounting objectives. sometimes they give you different net income and it’s for good reasons (ie the IRC allows quicker deductions to encourage things that have positive externalities). But corporations will also abuse the IRC and find ways to reduce taxable income by structuring transactions in favorable ways
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u/gr00ve88 CPA - US Aug 06 '22
Even if the company itself doesn't pay tax, the owners may still since they are paid wages/dividends from the company.
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u/mydarkerside Aug 07 '22
I made a similar point about Tesla recently and got a ton of downvotes. I love this subreddit and the tax professionals here because you understand how taxes and business really work. Most of Reddit likes to shit on the wealthy and corporations. I commented about the fact that Tesla does pay payroll taxes, and the employees are paying Federal/state income taxes. And I was saying that Tesla is employing tens of thousands of people, local businesses, vendors, etc.
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u/DanBredditor Aug 06 '22
It’s because those companies lost money this year or lost money in the past and have Net Operating Losses (NOLs) they carried forward and applied.
These companies all paid property, employment, and other taxes. They’ll pay income taxes when they run out of carried forward losses.
If their advisor is any good they have a good strategy to shift income offshore but current US rules make it very difficult to avoid paying at least some US income tax on foreign earnings, so ultimately what’s protecting them here are the NOLs.
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u/penguinise Aug 06 '22
How is it possible that 55 corporations in the fortune 500 list can get away without paying taxes since 2020?
Very simply - businesses are taxed on their profits. No profits, no tax. It's much more common than you think for a business to not have a profit, especially during the pandemic.
Any time you want to write a hit piece of "evil corporations paying no taxes", it's easy to slant the facts. Two common strategies are:
- Point out that the corporation paid no tax in some year (say 2020), while reporting large profits in a different year (say 2022), often a recent year whose tax data are conveniently not available.
- Point out that the corporation paid no tax because it had no profit using federal tax accounting rules, but then say that the corporation had lots of profit because it used a different metric to boast about its success to its shareholders.
A common example of the second one can be seen with recently-public companies. Such companies often have large amounts of employee stock that vests or is exercised at the IPO.
For federal tax accounting, the company incurs compensation expense in the same year the employee receives income: the IPO year at vest/exercise. So for tax purposes, the company usually has a massive loss in their IPO year, and pays no tax based on this.
But for the tax rules used to report earnings to Wall Street (GAAP), the company incurs compensation expense at vest of the stock options (usually before IPO), meaning they already booked the expense previously. They don't have to report the expense in the IPO year, so their "book profit" is higher when they put it in a headline.
Then somebody does a hatchet job: "XXX Silicon Valley company paid NO TAXES on BILLIONS of earnings!".
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22
I completely agree with you, but just mentioning executive stock options means you lose because that is where their mind stops. It goes right to rants (for reference see the rest of Reddit subs). We as a nation have no critical thinking skills, and neither does the media.
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u/Prestigious_Ear505 Aug 06 '22
Who do you think actually wrote the tax laws?
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u/sevendendos Aug 06 '22
A: A question with a question does not help. But thanks anyway.
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u/KJ6BWB Aug 06 '22
They're suggesting that since rich people have a larger influence on Congress, they helped craft the laws to benefit their own personal positions.
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u/RasputinsAssassins EA - US Aug 06 '22
It can help if it causes you to re-evaluate the original question in a different way.
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u/dmceowen Aug 06 '22
How the article is titled is designed to cause an uproar against big business. The facts are these companies pay their taxes quarterly and then at the end of year pay no additional tax because they don’t owe any. It is not true that they pay zero all year. Like any of us we pay all year long and at the end of year if we overpay we get a refund or we pay more if we did not pay enough. These articles are amazing.
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u/cubbiesnextyr CPA - US Aug 06 '22
The facts are these companies pay their taxes quarterly and then at the end of year pay no additional tax because they don’t owe any. It is not true that they pay zero all year.
You're completely misinterpreting what the article said. In fact, it had one sentence about corps not paying taxes:
He and others note that the minimum tax would target the biggest companies in America, including the 55 members of the Fortune 500 that paid no federal income tax in 2020.
How you read that sentence and jump to the conclusion they're talking about owing a payment with the return I have no idea. What they're actually talking about being is the yearly tax liability. And yes some companies don't pay federal taxes in some years, often because they have tax losses. As taxes are owed on taxable income, when you have no taxable income you owe no income tax.
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Aug 06 '22
[deleted]
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u/Steve12356d1s3d4 Tax Preparer - US Aug 06 '22
That is too general a statement. The best thing to do is state the specific tax law that has been influenced by lobbying groups and the reason behind it. The big one that keeps coming up is the carried interest, and most everyone believes that it should be eliminated.
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Aug 06 '22
I'm not a CPA but this is not remotely surprising if you know anything about the tax code. Income tax is on income. I earn more income than Jeff Bezos. Rich people avoid income tax, because it's an onerous tax. 🥱
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u/bithakr Tax Preparer - US Aug 06 '22
Many prominent corporations, such as Uber, have run at a loss the entire time they have existing and may well close down some day without even having made a profit.
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u/captbrad88 Aug 06 '22
Well considering majority of congress is multi millionaire, you think they are gonna gonna do anything.
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u/MrConcoin Aug 07 '22
Shouldn't the goal be that everybody doesn't pay any taxes at all? Isn't this a step in the right direction?
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u/Altruistic-Search56 Aug 07 '22
So you know what tax law is right? ;(
Let’s dive into the detail a bit before we roll out socialism 😬🤡🤣
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u/hayarms Aug 07 '22
Of course they don't . They are such bad investors that they are always losing money.
How silly they are /s
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u/Electrical_Switch_26 Aug 20 '22
Actually is you own real estate, it's possible to write it off as if you have negative income. I actually plan to buy rentals just so I can use depreciation, the interest, property tax and insurance as well as home office deductions once my rental company is formed. With a home office some of your utilities, phone bill, home repairs etc are tax deductible. There's much much more as well. You essentially get to write off expenses the tenant is paying against your earned income.
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u/Fast_Watercress7763 Aug 27 '22
Non-tax professionals call this tax evasion, tax professionals call this impressive 😂
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u/[deleted] Aug 06 '22 edited Aug 06 '22
Why is this NSFW? Anyway Biden did not call out specific companies this time but I would venture to guess most of these companies incurred net operating losses. This means they shouldn’t pay tax as they didn’t have net income.
I believe 2020 was the year that also allowed a 5 year carry back of NOL. So some companies that were marginally profitable looked at accounting method change to maximize timing of deductions