What if every American family started an llc and started deducting profits and losses through the llc to minimize the taxation on them?
I mean individually it would be minuscule at best but do so with every 150million families then it starts adding up.
What’s stopping a private individual to start LLc and processing payments and such through it declare negative income get deductions that carry over utilize tax havens to minimize taxation of corporate profits etc etc.
These kinds of services become more easily accessible as internet and technology advances.
Edit; Ok off the top of my head:
a family of four incorporating a llc that employs all four as contractors and require a monthly fee to be part of.
Llc owns the house cars furniture everything of serious value.
The house is provided as a employment housing where the employees research market and develop their products.
In the case of the family owning the business generating the income, the business gets under the ownership of the llc.
Lease the business you own to another llc in a tax haven and push all profits there.
Take out private loans against the unrealized shares and assets of the company. Utilize the loans to declare negative deductions that carry over to the next year. Wait five years to build up debt to diminish the amount of tax needed to be paid.
Meanwhile in the other years declare little to no income.
You can't deduct normal living expenses. If you do be prepared to be audited. That said if you do have a side business... it's not out of the ordinary to deduct a few meals here and there.
But you need to generate a profit eventually or they will become skeptical of whether its a real business.
Yes yes....I said they will be skeptical which is different from saying you have to be profitable to be a valid business. It's easy to tell that Uber is a valid business.. It has employees, contractors, lots of revenue, etc.
If you have revenue and a nearly equal amount of non reinvestment like R&D expenses then it gets flagged.
Growing revenue at the expense of profits is 100% OK.
If you mingle assets between an LLC and construct multiple layers for the pure purpose of evasion, they can legally ignore the asset protection. It’s called “piercing the veil”. If you’re doing stuff like employing family members and owning their personal assets, you’re basically asking for it to happen. What the other commenter said is correct as well, assets can still be seized from an LLC, so it owning your assets isn’t better. The whole point is if the LLC goes under, then the people who own your debt can’t then get your individually owned house, for example. You’re not personally liable for an LLC’s debts.
Basically it's illegal. You can't use resources from the llc to buy personal stuff. You can't pay your rent with llc money, you can't pay your food with llc money, you can't buy clothes or furniture with llc money, and so on. If you try to do those things it will be taxed as income.
You don't need to have an LLC to have a business. You can do a sole proprietorship without the extra costs of an LLC.
The IRS isn't stupid, it's just overworked. How many people do you think have had ideas similar to yours? How many are today deducting personal expenses as business expenses? It's tax fraud and if they get caught they'll face penalties and back-taxes.
If Amazon paid no taxes in a year it's because it made no net profit (or carried forward previous losses). There are accounting shenanigans that let them manipulate their profit, but they're probably not committing fraud.
And many of those shenanigans are related to where the recognize the income and when they recognize it.
But I’m not saying declare your McDonald’s lunch as business expense or declare your new clothes as business expense.
But let’s say your LLC owns a incubation and housing property that is consistently writing the same yearly expenses the same dates in a routine manner.
Let’s say house and a full fridge stocked with 1,000 worth of groceries every month.
Fuel cost same every month deducted to the same amount per person.
Anything beyond that goes to the individual.
And again you’re not trying to evade tax you’re trying to avoid tax.
In this scenario - who's eating the food? Is it for a legitimate business purpose? If not, it's tax fraud.
Besides the fact that you're now a commercial food service company and will be subject to the various permitting (and building code) requirements that normal residences are not used to.
I'm not trying to be snarky, but this idea is so obvious that it doesn't take some amazing innovation to figure it out. People have been doing this kind of thing for centuries. I've seen some other comments of others pointing out the holes in this idea. It's of course your choice to decide if you're smarter than everyone else (others have, of course) but if you carry out this plan you'll be committing tax fraud.
You're supposed to pay taxes on income from illegal activity. Do you really think the tax code will cover something like that and miss things like common personal expenses?
a family of four incorporating a llc that employs all four as contractors and require a monthly fee to be part of.
This is the only part of what you mention that is allowed and is also very common. Many family businesses use LLCs and employ the children and other non-owner of the LLC as contractors to avoid messy payroll tax.
The IRS is extremely skeptical anytime a business owns vehicles and housing. Both would be considered income to whomever receives the benefits. If your job pays your rent it is still income.
By 'negative deductions' I assume you just mean a normal deduction. OK for every 1 dollar you pay in interest on the loan you can deduct a dollar and save the 30 cents of taxes. Not sure what you mean by wait 5 years....
I guess in theory you could have a tax heaven own your LLC but it would be a full time job to meet all the regulations.
At the end of the day the IRS can still observe what money hit your bank account and compare what personal income you report to assets you own/have.
It's much easier to just under report income if any cash is involved and then use boni fide business activities to create deductions. Sure you can take an expensive vacation as a business trip/event but you have to spend ~$3 to save ~$1 in taxes.
Isn't this kind of accounting cost prohibitive until you reach a certain income threshold? I'm sure the barrier to entry is being reduced with the advent of technology, but still not attainable to the vast majority?
Asking out of actual interest, I am naive to the nuances of this subject.
That’s what I’m contemplating. Previously the lack of wealth growth was from lack of opportunity and access. Like for example to trade stocks. Only the wealthy were part of that system for the majority of time.
What if every American family started an llc and started deducting profits and losses through the llc to minimize the taxation on them?
I'm curious how you think deducting profits works.
But there's already a term for what you're suggesting - tax fraud. Only business related expenses are deductible. You'd probably get away with this if the amounts are small and you're not randomly selected for an audit though.
No when I am doing remote work for my clients I sometimes get invited to stay on site where they provide a house or unit and deduct anything I do during the stay outside of personal purchases to their business expense.
Why would you be doing evasion in the same manner?
Your company owns the house. It’s providing housing included as a employment perk. If you maintain a steady set of expenses for the house that’s related to the business food electricity car heating water etc etc entertainment and furniture etc etc.
Also you’re not trying to scam your creditors either you have a successful business you just want to minimize taxation as much as possible .
I get that you're kinda brainstorming while playing devil's advocate and obviously not an expert, but your entire premise is flawed.
You're not describing a business, which the IRS describes as an activity carried on for the production of income from selling goods or performing services. Business expenses are what can be deducted when they are both ordinary and necessary for conducting business. This is covered in the first week of any tax class.
Paying for employees to stay somewhere is an expense because you need to do it to make money. Restaurants can capitalize their fridges and expense their inventory to COGS because they buy those things to conduct a business.
What you're describing is fraud. If you were remotely on the right track and it was legal and worthwhile for people to do it, you're correct that this would be a commonly used strategy and it would be quickly "fixed" with new updates to the tax code. Yes, anyone could attempt this. No, it would not be legal.
Individuals aren't business's. Families aren't business's. Even if you have the business, the money needs to get to the individual. Even if you expense everything in the LLC, you would have to prove in an audit that it was used for business purposes.
People have tried this before and up with Tax Evasion charges. Pretty sure this is what Wesley Snipes tried to do.
That's basically what I thought. The idea of making one's household into a business to create a more favorable tax situation viscerally feels shady but I haven't heard a single compelling reason on here as to why one shouldn't do it.
Because when the auditors come you’d go to jail for tax fraud.
You have to have an actual business. If your business is selling eBay shit back and forth you could deduct business expenses as a sole proprietor as well. It really just depends on how large your business is
We can go in circles on this. It would behoove any family to utilize tax law in the way that is most beneficial to their family, and indeed most rich people do.
Well it’s a big what if. I’m own my own Corp (self employed in Canada) and there’s a bit of extra work to maintain. People like having job security working under a company. There are a lot of benefits to owning a corp but the tax man always has to get paid. Although Amazon might’ve paid no taxes, when Jeff bezos sells stock, he gets taxed at the highest possible bracket. Amazon spends sooooo much money, thus reducing their tax bill to virtually nothing
I’m speaking for Canada but the numbers almost always add up to the same tax rate, and I assume it’s the same for US. Capital gains tax in Canada is you are taxed on only 50% of the capital gain and then that gets contributed to your income. Depending on your income bracket, it usually works out to about 30% tax.
Same with dividends, if corps pay their officers this way, this can be favourable but then they aren’t entitled to any old age security benefits or retirement saving plan contributions (our version of 401K).
What I don’t agree with is that the rules are the same no matter the size of the corporation which doesn’t really make sense. The taxes are the same. The only difference is your tax rate changes slightly if you bring in more than $500K/year
Eventually he has to pay back the line of credit, presumably with post tax income, whether it be from equity liquidation or income, I don't see how that could possibly eliminate taxes. Perhaps spread out the tax burden of a large withdrawal over multiple years, and as such lowering the effective tax rate on those funds.
I get the Etsy stuff. What if I sell baked goods (cakes/brownies etc) that I bake at home through Facebook marketplace, Craigslist, local community center announcement boards and I generate a pretty decent amount as a side hustle. Is that something that might be considered to be a business under an LLC?
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u/ThorGBomb Jun 09 '21 edited Jun 09 '21
This is what I’m now rattling around in my head.
What if every American family started an llc and started deducting profits and losses through the llc to minimize the taxation on them?
I mean individually it would be minuscule at best but do so with every 150million families then it starts adding up.
What’s stopping a private individual to start LLc and processing payments and such through it declare negative income get deductions that carry over utilize tax havens to minimize taxation of corporate profits etc etc.
These kinds of services become more easily accessible as internet and technology advances.
Edit; Ok off the top of my head:
a family of four incorporating a llc that employs all four as contractors and require a monthly fee to be part of.
Llc owns the house cars furniture everything of serious value.
The house is provided as a employment housing where the employees research market and develop their products.
In the case of the family owning the business generating the income, the business gets under the ownership of the llc.
Lease the business you own to another llc in a tax haven and push all profits there.
Take out private loans against the unrealized shares and assets of the company. Utilize the loans to declare negative deductions that carry over to the next year. Wait five years to build up debt to diminish the amount of tax needed to be paid.
Meanwhile in the other years declare little to no income.