Better reread his response.  Money re-invested in the business is taxed.  As it is profits that are re-invested.

And I would not call you obtuse.

I still don't understand how higher taxes on corporation is going to prevent you to hire people, Draginol.

Salaries are paid by gross profits. Not by post-taxes money. You still have as much money to hire peoples after a tax raise than before. the sole problem is that less money comes to YOU in the end, but the business is still working mostly unnaffected (except for the sales, since consumers might have less money to spend, but that's deeper economics than what you are saying about firing people 'cause your taxes are higher)

"If I hire the 12 to 16 people I'd like to hire this next year to create a game team, the game they produce won't materialize for 30 to 36 months from the time we start."

If there is less money to re-invest in the business, the business does not grow as much, which means fewer people hired.  The cost of a person is an expense.  The investment is income, and is not.

one explanation (may not be the case in this situation) is that prior to the tax increase undertaking an investment in the company may have yielded a high enough post-tax return to justify it against Brad's alternative of 'consuming' it, but with a tax increase it may no longer look as attractive. That is, those employees would be expected to make a profit for the firm (otherwise why hire them?). The tax rise won't change this, but it will change the amount of (post tax) profit they now make. E.g. if you hired a worker for $50k, and they made you $100k, with a 20% tax you'd pay $10k, with a 40% tax you'd pay $20k. So you don't get quite as much money at the end of it, and may decide that you'd rather just spend the money now.

But if the investment is in people, it will (usually) count as an expense, and hence you won't pay taxes on it.

Lets say you (expect to) have profits before tax of $100k, and a tax of 20%, meaning post-tax you have $80k. If you wanted to, you could invest $100k into your business to hire extra workers (and hire out a building+equipment for them to use if you don't have enough space atm) to work on a project not materialising for say 3 years, meaning now you have profits before tax of $0, and post tax have $0. With a tax rate of 40% you still have the same post-tax profit if you undertake that investment. In fact you could raise taxes to 99% and you could still invest $100k into your business by hiring some workers to work on a long term project. You won't make as much money from those workers at the end of the 3 years due to the tax change, but you can still invest the same amount in them.

Ever hear of the expression - You have to have money to make money?  You have to have money to invest before it becomes an expense.  If the money is taxed away - no invest - no expense.

And if you get your timing right, you invest the money - get an expense - no tax.

In other words rather than getting all of your post-tax profits for this year, and waiting until the start of the next year to invest them (meaning you then pay all the tax on those profits and likely have to wait a year to get your expenses offset aganist taxable profits) you instead incur those expenses in the current tax year.

Since the 1 year is effectively an arbitrary time scale for the purposes of accounting+taxation, in reality it would mean you'd take the money you make throughout the year, use it to hire more staff throughout the year, and then at the end of the year when the actual taxes are calculated, they will take into account the investment of your profits throughout the year as an expense, and not tax you on them.

That does not work when it is taxes.  Did you know that even filing Bankruptcy does not eliminate a tax burden?  There is no way to "expense" before taxes.  You make a profit, the first thing that comes out (before food shelter or clothing) is taxes.

Counting your chickens before they hatch?  Might want to tell that to Circuit City, Heilig Meyers, Best Products, Service merchandise, S&K, etc.  But you will have a hard time doing that - since all are bankrupt (gone or going).

Sounds problematic to me, playing with the numbers to avoid paying taxes.

Isn't that illegal?

Um, it's quite simple:

Month 1: Make $100k revenue, $50k costs, put $50k surpluss cash into hiring staff (who will yield you say $1,000k in 2 years time).

Month 2: Make $100k revenue, $50k costs, and the $50k surpluss being invested into the staff hired in month 1,

etc.

Taxable year end: Company has $1,200k revenue, $1,200k costs, 20% tax = 0 tax., 40% tax = 0 tax

Alternative: Money is distributed to shareholders (or in the case of a private company is taken as drawings/salary by the owner to fund consumption):
Month 1: Make $100k revenue, $50k costs, 'withdraw' $50k.

Month 2: As above

Tax year end: Company has $1,200k revenue, $600k costs, 20% tax = $120k tax due from the company (or the individual if a private company), 40% = $240k due.

Scenario 1: Invest and you get your investment as an expense, and reduce your taxable profits, and hence the tax you pay. Scenario 2: Don't invest in the company, don't get your money as an expense, hence pay tax on it all.

(payment on accounts etc. for tax ignored for simplicity, although they wouldn't change the end result overall)

Tax avoidance is typically legal, evasion illegal (although different approaches are taken by different authorities). So for example making use of a tax allowance to delay or avoid paying tax would be legal, but falsely saying your profits are lower than they actually are would be illegal. Similarly authorities typically take a poor view of artificial tax avoidance schemes designed to clearly exploit loopholes in the law and will often get these held as illegal.

To give you a quick example, lets say that companies have an annual allowance for capital gains of $10k - the first $10k made will be tax free, the rest will be taxable. Now lets say you have 2 items you bought for $40k, and expect to sell for $50k, and that you're coming up to the end of the taxable year and want to sell them soon (and also don't expect to be selling items realising a gain of ~$10k or more in the next year). Rather than sell them both in this tax year you'd be better off selling one now, and waiting a couple of days to sell the other. The result is instead of being taxed on a $10k gain in this year and $0k the next year you're taxed on $0k this year and $0k next year. You've not done anything illegal, you've simply planned your affairs to take into account the tax implications.

There are many taxes you pay in business that are there no matter what.  For instance the tax you pay on the workers' pay check.  How bout the taxes you spend on items that are used?  I buy paper for paperwork and low and behold... sales TAX.  How would you get out of paying either one of these?

Only if you have a steady and predictable stream of money coming in.  As I said, counting chickens before they are hatched.   And truth be told almost no company figures bottom line on a month to month basis, but on an annual one because some costs cannot be broken down my month, only by year (and that is dictated by law, not by company policy).

So, no again, it does not work.  YOu report a profit at year end, not each month,  and that is what is either taxed or invested.

To clarify, I'm talking about taxes on profits (corporation taxes for a co, although it'd be income tax if it's run/owned by an individual). So the cost of labour will be the nominal cost of their pay check plus the taxes paid by the company for them as well - to the company, the cost is the combined amount of the two.

No, counting them as they've hatched rather than letting them hatch, and then almost a year later counting them . I'm also amused to hear you question a steady and predictable stream of money coming in - it's much more realistic than assuming you get 0 money until the end of month 12 where you suddenly get a ton of money, and it can produce the same result if you adopted the slightly more realistic assumption for a game company of having say 2 games released in the year, 6 months apart, each producing a high amount of sales initially which then die off (but obviously it's far simpler to make it easier to understand).

No, there is no law saying that a company can't break down costs month by month and determine how much profit it has made in particular months. Since a company will need to have a good eye on it's cash flow to make sure it doesn't suddenly go out of business even when possible, and will need accounting systems in place to produce it's annual accounts (if it is required to do so - not all businesses are), it isn't exactly much of a streatch to see that they would be able to tell how on track they are with their revenue and costs. In fact it would be a poor company that ignored it's performance each month and waited until 12 months to see that actually they were loss making from month 2 and really should have done something about it. A bit like closing the stable door after the horse has bolted. In fact it is the law that you do precisely such a thing for your accounts - if you pay for your electricity for 1 year with 3 months left in your accounting period, it'd be wrong to count all 12 months paid as an expense - instead 3 months will be an expense, and 9 months a prepayment (counted as an asset, and hence meaning you only end up having 3 months offset against your taxes).

You still don't seem to be grasping that businesses aren't working in some sort of vacuum and only making decisions once a year based on this. If a company makes a ton of money in month 1, what is it going to do with that? It has lots of spare cash lying around, and you seem to be saying they should ignore it, leave it in a presumably low interest account, and wait until the end of the year for it to be taxed and then and only then decide to use it. More likely is they will decide when they have that money what to do with it - do they invest it in the business, or do they withdraw it from the company? (and to help decide what to do they'd want to work out how much of that money is 'profit', i.e. what liabilities they will still have to pay that they will need some of the cash for).

So, if they invest that money back into the business by hiring more staff, guess what? It's now an expense, and won't be taxed at the end of that year. If instead it's taken as drawings, it will be taxed.

It takes a year to hatch them, yet you are spending the money each month as if they were already hatched.

There is no law that says they cannot "ESTIMATE", but there is a law against determining profit and loss on a monthly basis.  At least in this country it is called the IRS code.

No, you are not grasping the difference between cash flow and profit.  Profit is dictated by law - and is calculated on an annual basis.  Cash flow is dictated by Accounting standards and is calculated on a daily (or weekly or monthly) basis.

I'm starting to wonder if you're being deliberately obtuse here - you make money before the tax year end, invest (some or all of) it into the company by hiring staff to undertake a project, and hence don't get taxed on that money when it comes to the year end, as opposed to waiting until the year end, being taxed on the money, and then start thinking about what you want to do with the money you've been sitting on for ages - what is it you're disagreeing with or not understanding about the 'invest->teated as expense->less tax paid for the year' step? Also profit is a purely accounting measure, so for you to say that I don't understand the difference between profit+cash flow, and then point to cash flow as being the one determined by accounting standards is pretty hilarious! It also suggests a possible lack of understanding that there is more than one kind of profit as well - the profit reported in a company's profit and loss account (determined by the relevant accounting standards) is not the same as the profit a company is taxed on, for example.

Anyway my last example to illustrate it (since I dont want to spend any more time on a fairly small issue):

2 companies, A and B: Initially are identical; Undertake 12 projects each month, each requiring $10k a month to run (all of which is allowable as an expense for tax purposes), and each expecting to provide a 1-off revenue of $200k after 12 months (and as I mentioned before if you want to be more realistic then reduce the no. of projects and have the revenue peak and then drop off from each one). It starts off with 1 super-project ending, yielding a hefty amount of revenue over the first 12 months, before stopping (basically so it has money to invest and won't have carried forward losses in year 2 to keep things simpler).

Month 1: Undertake 1st project, cost $10k, revenue $xk

Month 2: Undertake 2nd project, costs $20k, revenue $yk,

.

.

.

Month 12: Undertake 12th project, costs now $120k, revenue $zk. Co's taxable profits work out to be 0 for this year (again if you want you could always increase this hypothetical figure if it makes you happier)

Year 2:

Month 1: Undertake 13th project, Costs $120k, revenue $200k

Co has $80k of cash (n/t: That's your cash flow, if you're still not sure). Company can either decide to invest this in hiring staff to undertake additional projects the next month, or it can hand it out to the owners (or it could invest in some other way that might not be fully allowable as an expense, etc.).

Company A decides to invest this money, and undertakes 8 extra projects next month. Company B decides to hand it over to the owner(s).

Month 2: A: Costs $200k, revenue $200k; B: Costs $120k, revenue $200k

.

.

Month 12: A: Costs $200k, revenue $200k; B: Costs $120k, revenue $200k.

Taxable profit for the year:

A: $80k B: $960k

A would have also made $960, but they chose to reinvest the money they made back into the business, meaning they could count it as an expense, meaning they're only taxed on $80k, as opposed to $960k.

If you don't like the idea of A counting on receiving revenue from future projects, then have them only undertake 1 extra project in month 3, (and then only undertake future projects when they've made $120k from current ones that have ended), so that they're 'counting their projects as they hatch'. This would still result in a lower taxable profit for the year than B, because the investment in any projects made would be an expense and hence tax deductable. Similarly if you want to complicate things (to make them more realistic) by say introducing borrowing, inflation, effective rates of return for the level of risk, limited number of projects which also feature diminishing returns to scale etc. you can, but there's little point if you don't understand the underlying point.

How about you showing us the tax code you are using?  Its certainly not the American one.  Maybe its possible for you to do it, were as we can not.

No, but I beleive you are.  Clearly you dont understand busines 101.  Until you do, you can pipe dream, but real business men will merely smile and nod at the naivete' and out right wrong understanding you have of business.

Thats putting it nicely.  I have brought up some of the ideas that have been floated in this thread during tax conversations with business owners I know. Several of their responses were quite crude.

Any tax code which allows money spent on employees to count as an expense for tax purposes (which would likely be pretty well every capitalist country). Are you really saying that the US (or any other similar country) taxes a company's revenue, rather than it's profit?! (i.e. that costs like staff wages aren't allowable). While there are differences between countries on what they deem taxable profits to be, this isn't (to my knowledge) one of them. In fact I'd be interested if you could point to a tax code from any country that does tax just revenue/doesn't allow the cost of hiring staff as an expense.

So after I again ask you to point to what part you don't agree with or understand, you yet again fail to, and just say I don't undertand business? What a convincing response...

Again your pipe dream.  NOw I want you to show me the company (not employee) that makes a consistent profit month to month.  ANy one will do.

MOre likely, what will happen with your company (before it goes out of business) is:

Month 1: Estimated Profit $10k (note the estimated part)

Month 2: Hire employee, But estimated profit goes to 0

Month 3: Fire EMployee (no money to pay them now), estimated profit goes to $20kl

Month 4: Hire 2 employees, estimated Profit $5k

Month 5: Hire no one (but do not fire).  Not enough to hire anyone. Estimated Profit -$15k

Month 6: Fire 2 employees (dont have the money, member?). Estimated Profit $10k

etc.

Now, not only are you jerking around employees (and have a damn hard time hiring anyone qualified with that reputation), but you are incurring more costs than you thought!  How?  I dont know if they have it in your place, but there is something here called the UI tax.  And guess what?  That goes up the MORE you fire people.  So if the company had waited to hire people when they KNEW how much money they had (note the estimated above), they would not have had to fire them all the time, and incur ANOTHER tax.

But with all this, I still donot expect you to understand. In your perfect world, companies make the same money every month, so they can work on fiscal month basis, and hire people before uncle sam gets his dough.  But as you can see (if you want to read and understand), is Uncle Sam is going to get his money anyway.

Oh, and one more thing.  While ALL profits are taxed, not all losses can be written off against future earnings.  And get this one, companies do not get rebates when they LOSE money.  They just can offset future tax payments with part of the current losses.

I did not have time last night to point out your naivete' and ignorance.  Consider this your rebuttal.  Not that I think you will understand, as you are trying very hard not to, but you have been rebutted.

From before:

If you can't understand the basic point of expenses being discountable against taxes, what point is there in me spending far more time making the example more realistic? The example is not meant to be realistic, it is meant to remove any other complications to see the one thing on it's own and the effect it has easily (without removing a complication that would in all, or almost all, cases reverse the result obtained through simplification). If you want the 'your example is too simplistic' point to carry much weight, then show what I've excluded from it that would affect the result (not the amount of the result, but the actual result itself), and which applies in so many cases that the exceptions where it doesn't apply are therefore of little significance.

As to the risk of firing people and incurring expenses relating to that, again see before:

In other words if you aren't very confident about your estimates, and hence want to wait until you have the money (or most of it), it doesn't affect the result (that you reduce your taxable profits and hence tax payable via the investment), it just affects the amount you reduce it by.

You likely didn't read my post fully seeing as I already answered your 'rebuttal' points in it anyway, and then you say I should read and understand? Priceless!

As to uncle sam getting his money anyway, yes, he probabily will - in the above example (if everything goes to plan) you'd expect the investments (that reduced your tax burden for the year undertaken) to yield a profit that would then be taxed in the future. It's simply a matter of timing - better to make an (allowable wholly or partially as an expense for tax purposes) investment in this tax year than waiting until the next tax year because you get the tax relief far sooner.

I'm guessing you didn't realise (one of the reasons) why I made sure the company in the example wouldn't have losses to avoid complication. Either that or you didn't bother reading it, but just jumped straight to responding to it.

If you're going to try and do a rebuttal, make sure you've read the post you're disagreeing with fully first - your above 'rebuttal' points suggest you didn't, since I'd already answered all of them in the previous post.

YOu still dont get it.  Where's the profit?  Again you say "if this, then that, but this then that".  You still dont get it.  I gave you a "simple" example.  I dont need to critique every line item of your example as it is unrealistic.  I used simple numbers to keep it simple.  Of course the real world is more complicated, but you cant even refute the simple example so how are you going to refute a real world one?

Yes it is priceless.  As in worth less.  To try to discuss something when you dont even have the basic knowledge to begin with.  You are a government worker, not a business owner.  They are the only fools that spend money they dont have in anticipation of getting the money (well at least not the successful businesses).  You keep talking about spending "profits" each month, and I keep trying to tell you - they do not exist.  They ESTIMATE profits more frequently, but report profits annually.  And as I explained to you already, that is both an accounting standard, and the law.

You cant spend what you do not have, unless you are a fool.  And business fools do not stay in business long.

What I and others are saying busniess can only lessen its tax burden, not get rid of it entirely.

  The taxes an employee pays to the government are matched in taxes on the employer. How do you expense that away?  The answer is you don't this tax gets paid regardless if money is made or not.

  What about taxes on items the business consumes? 

When I buy/sell/use shrink wrap I don't have to pay sales tax on what I buy and sell (though I do have to collect it.)  But when I use the shrink wrap I am supposed to pay the sales tax.  How do you propose I get rid of this tax?

If you're talking about taxes relating to the hiring of employees, that's treated as a cost of hiring those employees. As I already mentioned, I was talking about corporation tax (the tax on a company's profits).

What about them? If the company faces a sales tax on it's products it'll increase it's price either wholly or partially to reflect the tax. Again it's not a tax on the company's profit.

I did, both in my post before you even made the example, and again in my response to it:

(now for the third time!!!):

In case you need it spelled out even more, this means that you don't end up hiring employees only to fire them the next month when your profit estimate changes, as happened in your example. You could also of course just borrow to fund a temporary cash flow shortage if you managed to run out, which would similarly solve the problem.

Although a different topic (since you still don't understand that you can spend the money you do have), you can spend money you don't have and do better in business via borrowing. If you can undertake a low risk project which you expect to yield a 20% reteurn, and can borrow money (that you don't have) at 5% (and the difference in risk is worth less than 15%), you would be a fool not to spend that money you don't have.

Rather presumptious, to tell me what I do for a job, don't you think? I also don't see what relevance your guess as to what I do for a living has to do with this conversation. Still it was about as accurate as most of your latest posts.