Lion of the Blogosphere

Archive for the ‘Taxes’ Category

Under the new tax law, it pays to be a sole proprietorship

That was the first thing I said about the new tax law when I read it two weeks ago. Yesterday, the NY Times had an article on the topic, predicting that the new tax law will accelerate the trend of people working as “independent contractors” instead of “employees,” and also correctly pointing out that in most cases it’s cheating, businesses are theoretically not allowed to classify someone who is treated like an employee as an independent contractor.

Written by Lion of the Blogosphere

January 1, 2018 at EST pm

Posted in Taxes

New York Times catches up to my blog

On Monday, I wrote about how independent contractors, anyone filing a Schedule C, would see a big tax cut.

Today, the New York Times catches up to me and has an article about it.

The NYT article legitimately singles out “IT specialists.” The only department in the big corporation I work for that has a lot of independent contractors is IT.

Everyone is now going to want to be a 1099 and not a W-2. The tax savings are big, and easy, no dealing with the hassle of being incorporated.

S corps are out, W-2 employees are out bigtime, sole proprietorships are in.

* * *

I don’t DESERVE a big tax cut just because I happen to not be an employee, but I sure as hell am going to take the money and not donate it to the government.

Written by Lion of the Blogosphere

December 20, 2017 at EST pm

Posted in Taxes

Who wants to move to Mesquite, Nevada?

That’s where the crazy guy lived who shot up all those people in Las Vegas.

With no income tax and low other taxes, Mesquite, Nevada is the perfect place to escape local taxation that’s no longer deductible on your federal returns. Plus Mesquite offers very affordable housing, a mostly white demographic, lots of retired people. With a better climate than Florida, none of that oppressive humidity. Lots of places to buy guns if you’re a gun nut.

But no jobs (except for crappy low-wage service industry jobs) and probably nothing in the way of culture. I assume that it’s a very prole place.

Written by Lion of the Blogosphere

December 20, 2017 at EST am

Posted in Proles, Taxes

Who wants to move to Florida?

Now that there’s no longer a federal income tax personal deduction for state and local taxes, it pays to move to Florida where there’s no income tax.

Florida is king! Too bad it’s full of NAMs.

Written by Lion of the Blogosphere

December 20, 2017 at EST am

Posted in Taxes

Who benefits when corporate taxes are lowered?

The C corporation income tax is being lowered from 35% to 21%. So who benefits from this?

Well, one obvious answer is that C corporations benefit! But corporations aren’t people, they are abstract legal entities. Who ultimately winds up with the extra money?

When individuals have more money from lower taxes, they tend to spend most of it. (I don’t, at least not in the short run, but I’m not most people.) This is believed to “stimulate” the economy. (But with every asset in a bubble these days, it doesn’t seem to me that the economy needs any more stimulation.)

So does that mean that corporations will spend their extra money? I say not very likely. Unlike personal spending, nearly all corporate spending is considered a tax deductible business expense, so taxes have never been much of an impediment to corporate spending, and in fact may even have the opposite effect of encouraging corporations to spend income on “growth” rather than waste the income by giving 35% of it to the government.

There is some corporate spending that is capitalized and therefore not immediately deductible from income, but there’s no evidence right now that corporations with profits are having trouble financing capital projects. Remember that the biggest corporate expense, payroll and employee benefits, is immediately deductible from corporate income.

So when corporations have more profits because of lower taxes, they tend to distribute those profits to shareholders. For privately held corporations, it’s pretty simple to trace the path of money to the shareholders who own the corporation. However, C corporations are uncommonly used for privately owned businesses because until this tax bill, C corporations have generally been taxed more harshly than all other business forms. Only 5 percent of business are C corporations.

Why be a C corporation at all? It’s required in order to be a publicly traded corporation. The vast majority of the biggest businesses are publicly traded. Which is why even though C corporations are only 5% of businesses, they represent 62% of all business revenues. And that is why C corporations have been subject to higher taxes. It’s just a really big pool of money that can be taxed, with no apparent victim to complain about the tax, and no easy way for C corporations to switch to a lower-taxed business entity. Theoretically, high corporate taxes should lower the value of corporate shares, but corporate shares have been historically valued quite highly during the last 30 years. Publicly traded corporate shares are valued way above what they ought to be based on their expected future dividend stream. Based on current stock market valuations, there isn’t any sound reason to lower corporate taxes.

However, lowered they will be, so who benefits? Remember that, because dividend payments are pretty low, and approximately half of publicly traded corporations don’t pay dividends at all, people buy stocks not primarily for the dividends but because they expect to sell the stock in the future for more than they paid for it. And yes, many corporations will try to help their shareholders by using their extra income to buy back their shares.

So ultimately, the biggest beneficiaries of a sudden lowering of the corporate tax rate are people who have owned stocks during the last year. There has been something like a 28% increase in the S&P 500 since Trump was elected, and I suppose that was the smart money anticipating the Republicans paying back the investor class, even though the investor class is no longer Republican. The prole whites are Republican, and rich investors hold their noses while they enjoy their Republican-created windfall.

If you are buying stocks today because of the tax cut bill, you are probably too late to enjoy the benefit of that, the tax cut is already factored into current stock valuations. (However my stock advice has always been very bad, so I could be totally wrong about that and maybe you should buy now in anticipation of selling to greater fools in the future.)

* * *

The corporate tax cut will also benefit venture capitalists who invest in small start-up businesses in the hope that they will be able to make huge profits in the future when those businesses go public. The lower corporate tax rate will cause all publicly traded corporations to have higher valuations, so the venture capitalists will make even more profits than they already make when the corporations they invest in go public.

* * *

I will add one argument for why corporate taxes shouldn’t be raised too high. The Laffer Curve kicks in at a much lower marginal rate for corporations, compared to individuals, because corporations have much better tax avoidance tools for shifting their income to lower-tax countries.

This tax avoidance was traditionally the hardest for U.S. corporations because the U.S. taxes worldwide income, and has the sophisticated powers of the IRS to enforce that, although many big companies (especially Apple and GE) are very adept at finding loopholes to avoid worldwide tax. But this tax bill is ending worldwide taxation, which is actually another huge tax giveway to the biggest corporations.

U.S. taxation on worldwide income was something that kept the whole world honest (although the whole world didn’t necessarily appreciate it). I think that a potential huge blowback that could result from this tax bill is that tax avoidance will be RAMPED UP as a result of ending worldwide taxation of corporate income, rather than reducing it merely because we lowered the corporate tax rate. And the effect will be JOB LOSSES as corporations move more manufacturing and operations to tax-haven countries.

However, the new rules are not yet fully understood.

Written by Lion of the Blogosphere

December 19, 2017 at EST am

Posted in Taxes

Totally confused about “qualified business income”

Does this refer to all Schedule C income up to $157,500 (for an individual) before it begins to be phased out? Does that mean you get yourself a huge tax cut (on account of 20% of your income being “deductible”) if you switch from being an employee to being an “independent contractor.”?

* * *

If you own an S-corporation, you are required to pay yourself a W-2 wage, and the new tax bill makes clear that the 20% deduction for qualified business income doesn’t apply to that W-2 wage.

However, S-corp owners never pay themselves a wage equal to 100% of the income, they pay themselves a lesser amount. How much less they are allowed to pay themselves has never been clearly defined by the IRS, and the fact that this income-shifting ability exists at all can be considered a loophole, and applying this 20% deduction to that income expands the loophole that much more.

The reasons NOT to become an S-corp is because of the massive extra complication in your tax reporting. If you have to pay an accountant an extra $5,000 a year to deal with it, you eat up a lot of your tax savings from not having to pay FICA taxes on the S-corp income. On top of that, in many states you incur extra taxes for having an S-corp that eat up any federal savings. New York State certainly has that.

The new tax bill says that it applies to sole proprietorships as well as S-corps. Sole proprietors don’t normally pay themselves a salary. So therefore, all of the sole-proprietorship income up to the cut-off and phaseout which begins at $157,500 for an individual taxpayer (and twice that for a married taxpayer filing jointly) would benefit from the 20% deduction (making S-corps obsolete for people making less than $200K)? Or none of it?

I thought Republicans were in favor of making the tax code simpler? This is more complex than it was before. I don’t think anyone understands it yet.

* * *

I believe the intent of the law is, simply, to give a huge tax break to people working as independent contractors (and file a Schedule C) relative to people working as employees.

As an independent contractor myself, thank you Republicans.

Written by Lion of the Blogosphere

December 18, 2017 at EST am

Posted in Taxes

Lion’s tax proposal

We should close loopholes and eliminate deductions that primarily benefit the rich (yes, including deductibility of state taxes and mortgage interest on expensive houses, and even charitable donations), including the carried interest loophole, and use the savings (and only the savings) to lower FICA tax rates. There are a lot of people who pay no income tax but do pay FICA tax. Lowering the employee share of FICA taxes would be a fair way to distribute the additional tax revenue from loophole closure.

Written by Lion of the Blogosphere

November 17, 2017 at EST pm

Posted in Taxes

Republican tax plan

House Republicans release tax plan.

The plan includes abolishing the estate tax, which is a massive giveaway to the richest of the rich.

And lowering the corporate tax rate from 35% to 20%, while doing nothing about the fact that huge corporations like Apple pay way less than 20% because of the tax-accounting fiction that their profits are overseas.

I don’t know if this plan still includes the 20% pass-through taxation, which is just a big loophole to allow every rich person to pay only 20% instead of 39.6%.

Written by Lion of the Blogosphere

November 2, 2017 at EST am

Posted in Taxes

Did Paul Manafort really commit criminal tax fraud?

Let’s remember that big corporations like Apple hardly pay any federal income tax because of the fiction (or maybe the reality) that their profits actually belong to overseas subsidiaries, and according to the tax laws, the profits are only subject to U.S. income tax when the subsidiary pays a dividend to the parent corporation in the United States.

Paul Manafort presumably set up the same sort of structure for his international consulting business.

The primary illegality alleged in the indictments is that he had these foreign corporations spend millions of dollars on a mansion in the Hamptons, an apartment in Arlington Virginia, etc, and these were personal expenses not business expenses, and therefor were in the nature of dividends for which he didn’t pay income tax. (Also expensive cars, rugs, clothes, artwork.)

I don’t practice tax law in real life, so I have no idea if this would normally be a criminal fraud prosecution, or just a civil action by the IRS.

Written by Lion of the Blogosphere

October 31, 2017 at EST pm

Posted in Politics, Taxes

Ann Coulter, read my blog

She wrote this column where she accused Stephen Paddock of being a money launderer.

Too bad she didn’t read my blog. Three days before her column, I wrote:

I am almost certain that the news report that he made $5 million from gambling in 2015 is fake news. Someone is almost certainly ignoring his reported gambling losses during the same year which would be reported as an itemized personal deduction on Form 1040 Schedule A.

What’s more likely? That Stephen Paddock was a master criminal and the authorities are hiding that from us? Or some reporter from the Los Angeles times is too lazy to fact check an article and too stupid to realize that the claim in the article is absurd?

Hanlon’s razor: never attribute to a conspiracy that which is adequately explained by stupidity and incompetence.

Written by Lion of the Blogosphere

October 16, 2017 at EST pm

Posted in Taxes, Uncategorized

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