h a l f b a k e r yA riddle wrapped in a mystery inside a rich, flaky crust
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This whole time, I've been foolishly in the business of "sophocles, living, inc." paying way too much taxes.
Here's the scheme (forgive me if this is old, but I couldn't find it). Bear with the math. It's really not much, now (80% zero's after all...)
If I run a business, and the corporation
makes $10,000 revenue for the year, but has $9,000 expenses, the corporation gets taxed on the gain ($1,000), not the revenue ($10,000). If the same business has $10,000 in expenses, they have zero gains, and zero income tax. Many companies exploit this by writing off lots of expenses (building leases, meals, entertaining clients, etc).
So, it almost naturally follows, that I should incorporate my personal life. Let's say I make $10,000 for the year as a person. That person gets taxed on the full $10,000 income. But hey, that's not my NET! I have building leases, meals, & entertainment, just like a company.
Enter, "Sophocles, Inc." Mission Statement: "Provide a full and fruitful life for sophocles". The revenue is provided by putting sophocles to work. Track all his expenses (housing, meals, entertaining clients (friends)). That vacation in France? Totally in line with the mission statement of the business. So, if I simply spend all the money that I make, then my NET INCOME is zero. My income tax, as a business, is zero.
Aha, what about sophocles the person? Don't they still tax his wages? No, he gets no wage income. His employer pays "Sophocles, inc.", not "Sophocles the person", after all.
W-2 vs. 1099
http://www.topechel...acting/definiti.htm
[thumbwax, Apr 18 2006]
IRS Instructions for corporate tax return
http://www.irs.gov/...irs-pdf/i1120_a.pdf
[theircompetitor, Apr 19 2006]
[link]
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Perhaps you should be "The Sophocles Group", a not-for-profit 'organization'. It takes multiple people to incorporate. |
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Multiple people, yeah, I like it. Or, multiple people, all their own "inc". Just charge the wife rent to lower "Mrs. Sophocles, inc"'s net income, and then just be sure to spend the rent money on a flat-screen TV or similar "expense" to keep avoiding taxes. |
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Assuming your company pays sophocles no wages, I think you'll also qualify for unemployment benefits. |
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This can't possibly work, can it? |
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You'll get done for embezzlement...
;-) |
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It doesn't seem quite fair that corporations only have to pay taxes on their net gain, whereas we get taxed for everything. Twice, when you consider sales tax. |
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In what jurisdiction do you want to play this game [sophocles]?
There are always ways to reduce your tax income, even as a salaried employee. |
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My favourite thus far is the LAQC (Loss Attributing Qualifying Company) figure in New Zealand. A local NZ company with less than five shareholders opts to become an LAQC, all the directors must be personally liable for their share of the company's income tax (that's why you don't get many of these around!) but their advantage lies in being able to offset your earnings (yes, even your 9-to-5 salary) against your expenses (like an investment property that nominally loses you money whilst still appreciating in value through capital gains - CGs are not taxable in NZ). Done well, you would pay very little tax. Done really well, you can potentially claim a tax refund. |
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And, by the way, it's not "Tax Evasion" it's "Tax Minimisation" |
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sophocles, in the US that's called a subchapter S corporation. |
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World, what's really unfair is the double taxation of dividends. Or the estate tax. |
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Most corporate spend is actually translated into income for everyone from direct employees to service providers. So the fact that they tend to attempt to minimize net has very positive consequences for the economy. |
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But that arguement holds true for people as well. Imagine the economic boost if it made sense to spend as much as you make. |
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[tc] I read & was told that S corp, LLC, or inc was only benificial if you made over $150k or had legal liabilities you wanted to protect yourself from. |
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Would what you said really work for someone making less than $150K per year? |
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Hey, I'll sell you the right to claim me as a dependent on your tax return. (Since I'm not claiming anyone myself). We can split the savings. Any takers? |
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I'm not sure, but I think the amount you'd lose for self deduction wouldn't be made up by someone else's dependent deduction. |
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// whereas we get taxed for everything// |
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The solution of course is to allow people to live at work, and for workplaces to serve food. Then the firm gets added writeoffs, and you the person now have fewer taxed expenses (e.g. rent; food). |
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This is not a debate about whether corporations are good or bad. |
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This is simply an idea to say "if our government loves corporations more than people, then let the people become corporations." |
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[Worldgineer] is already stating the rest of what I was trying to get at. Thanks! (PS: <shameless plug> World, you must go check out my Pendulum Bridge. I figure you would have something to say there...</sp>) |
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yes, of course, [World], that's why tax cuts are stimulative to the economy. And, taking advantage of those benefits to a larger extent than is possible for people on W-2s is why so many people do in fact use "S" corporations. |
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but the cutoff for the benifit of this is at 150K USD/ year, right? |
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I can't see how, Zimmy. The fees for creating an LLC or a subchapter S are not high at all. Consult an accountant. |
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This has also been done in the UK, traditionally by IT Consultants and COBOL programmers to great effect over the Millenium. The income gets paid to zen_tom inc. and expenses are claimed etc. meanwhile, zen_tom inc. pays zen_tom esq. a minimal salary (under the tax threshold), but provides him with a company car, company house, subsidised living expenses etc. I believe however, that recent tax legislation (over the last 3-4 years or so) has served to make this particular dodge unworkable now. Instead, I've heard rumours of people who 'invest' in 'Consultancy Farms' again, who pay below the tax threshold for services rendered, but, who also pay out a regular 'dividend' which is currently (I believe) considered a non-taxable benefit. It's probably only a matter of time before that particular loophole gets closed too. (Assuming of course, that this isn't a mixture of lies and misinformation half heard and half remembered from a drunken pub conversation with someone who was telling me about their 'mate') |
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The master loophole closer: Fringe Benefit Tax. |
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As far as "baked" in other areas, usually, you have to have your business mission be something other than simply "a good life for one guy". That's where the crux of this lies, in making it up-front that we humans should have the same benefits as corporations, without having to pretend we're a software company who just happens to use a bedroom for business, etc. That bedroom is actually supporting a full & good life for me, and I shouldn't need to lie about it. Oh, well, taxes paid, moving on... |
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I was trying to find that written down somewhere - that the purpose of a corporation can't just be "a good life for this one guy" - and couldn't find it. Where is that actually constrained, do you know? |
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Can we not amend that mission statement a bit and have it read: "A good and meaningful life for this one guy"? |
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Non-optional disclaimer: "'Good' and 'meaningful' as defined by 'this one guy'" |
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[jutta] I confess that I don't know where it's written down anywhere. I am currently perhaps a bit too timid to try it out with the IRS just yet. |
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There are many ideas that I'd put on the HB but not dare try with the IRS, police, etc. This is one. |
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I know the rules for incorporating have been relaxed. It once required 5 people, then 3, and now 2.* I don't think you can do it alone. The President can also be the Clerk, but not the Treasurer. Someone else has to hold that position. And you must be incorporated 'normally' before declaring your corporation 'S'.* |
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*I don't pay attention to this unless I need to, but my information is fairly recent. Has it changed again in the last year? |
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I still think not-for-profit is the way to go. It doesn't have as extensive a history of corruption so is less closely scrutinized. You can make a profit, but all profits must be applied to the corporate physical plant (including grounds and infrastructure such as electronic equipment) to avoid taxes. In this case the physical plant is Soph's dwelling(s). This way deducting expenses is minimized, therefore less suspicious. Also, an altruistic mission statement is accepted more easily, though I agree with [methinksnot], it should be more generic... and obscure. |
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This is, of course, a tad dishonest, but at least with a not-for-profit the bottom line is supposed to read zero. |
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[longshot], you became an 'S' without first being a 'C'? Seems that's what I'm missing. I didn't know it yet possible to go directly to 'S'. It wasn't always this way, but makes sense that it should be. |
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longshot9999 writes: "Companies have to declare what kind of business they're in (and there's a standard set to choose from)."
So, can we get a pointer to this standard set, anywhere? I'm not challenging its existence, but it does seem awfully hard to find. |
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I'd love to have someone actually do this and then hear of a lawsuit resulting from a disagreement between the board members and the individual about what's best for the individual. "But I love her!" - "That little gold-digger's only after your money, and you're not buying her any more jewelry." |
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Then just as you start to get your life under control, the in-laws buy out your wife's shares and perform a hostile takeover. |
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[thumbwax], you'd still have to set up a corporation to get the tax advantages - a DBA just lets your corporation or sole proprietorship trade under a new name. |
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Interesting! Standard Industry Codes, hm, hm. There's a lot of wiggle room there - between Major Groups 88 (private households), 89 (miscellaneous services), and 99 (nonclassifiable establishments), I'm starting to think that this is more an attempt to put everything somewhere than an attempt to constrain. |
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(wonders if there's a SIC for public:evil:contracting company) |
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Just live on the run like I do. Sure, I had to break into a strangers house to type this, but I have my freedom, damnit! |
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I talked to a slightly more legally well-grounded person about this. He explained that the test that an IRS auditor would apply to decide whether or not a business can deduct costs from its taxable income involves whether or not the costs are related to the income. |
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In other words, if "being Sophocles" is the source of income for the corporation (for example, if Sophocles is a pop star who has to uphold a certain image in public), then costs related to that can be deducted. What the stated purpose of the corporation is doesn't really matter. |
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That's hearsay, may be misunderstood, and rules elsewhere may vary, but it makes some sense to me. |
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How do you define celebrity, though? |
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Can I say I'm a public figure just because people I don't know regularly read my blog? |
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Not that it matters, since I don't pay taxes, as my job is off the books. |
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jutta, as to where corporations declare what they do, I refer you to the attached link explaining Business Activity within a corporate tax return. |
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A separate (and potentially more accurate) place would be to look at the description provided by any detailed financial quote service. |
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//professional bastard//
//crazy bitches// |
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Are you refering to lawyers? |
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Allright, who's the smart-ass who linked to a 23 page PDF written by the IRS! This is the half-bakery, dammit! |
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But reading that, I still think there's some wiggle room to be up-front about it in a perhaps novel way. Corporations always wiggle to become people, with first ammendment rights & such, so why not let people wiggle to be corporations to get the tax breaks. The corporations didn't have to give up their profit-motive or gain souls to become people legally, so why would we have to become profit-machines to become corporations? |
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Also, in the US, if you make no profit for 3 years, the IRS reclassifies you as a "hobby", and no more business breaks. So, instead of $0, you just report profit of, say $0.51 one year out of 3. |
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I'm quite certain that if the government caught on to these schemes in a large enough volume the rules would change. |
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Quote from the 23 pg IRS PDF |
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//IRS E-services make taxes easier.
Now more than ever, businesses can enjoy the benefits of filing and paying their taxes electronically.// |
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Yeah right, making it electronic makes taxes FUN! |
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Umm, [UnaBubba], I don't think I quite got that. Could you draw me a map to help better explain it? Oh, and please include any relevant account numbers, passwords, bank names, etc. I learn so much faster with a real life examples to compare it to. Thanks! |
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Sadly, this idea was doomed from the moment that the very last word of it's title was written. Tax Evasion is the illegal witholding of tax payments from the government. The phrase that should have been used is Tax Avoidance. That's legal. Sadly though, sophocles betrayed his criminal intentions in a rather public place and was probably hustled off in a large, black van soon after posting the idea. Has anyone heard from sophocles since April, 2006? Thought not. |
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[Dr. Bob] -> yeah, right after April 2006... I got a job ;) |
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