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Forum Post: Another loophole that the 1% ers use - Pass-throughs

Posted 12 years ago on Jan. 10, 2012, 4:40 p.m. EST by brightonsage (4494)
This content is user submitted and not an official statement

The Wall Street Journal has an article re Pass-throughs

A blogger has one as well: "Change to biz-tax structure would have repercussions for pass-throughs"

by John Michel on May 20, 2011

"Congress seems to be waking up to the long-evolving scenario that perhaps as many as half of all U.S. businesses and companies that employ half of the private sector workers are not federal income-tax-paying entities. They are so-called “pass-through” entities, better known as partnerships, limited liability companies and S Corporations."

John F. Michel, CPA

In fact, the IRS recently published statistics for corporate tax return filers for tax years 2005 through 2008, and it showed the number of C Corporation returns declined year after year while the number of S Corporation returns increased steadily over the same period.

Why is it, that when the economy is enjoying record profits the tax revenues go down and politicians want to collect taxes from people who don't earn enough to pay taxes?

Maybe it is because there is a leak in the pipe. The 1% has found (or bought) a loophole to lower the taxes they pay. Of course the deficit gets bigger but then they can complain about that too.

Where are the pass-throughs for the 99%?



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[-] 0 points by gosso920 (-24) 12 years ago

Where are the pass-throughs for the 99%?

That's easy - just don't pay taxes. If it's good enough for Charles Rangel and David Dinkins...

[-] 1 points by brightonsage (4494) 12 years ago

And you think that I would excuse that? What would make you think that? Are you confusing me with a Republican politician? As far as I know, they just blatantly broke the law and it wasn't even a law that they tailored to excuse their failure to pay. In any case, I wouldn't excuse either. Are you excusing the folks who paid lobbyists to change the law to benefit them personally?

[-] 0 points by toonces (-117) 12 years ago

I operate under an S corp. I am using a legal tool to lower my tax burden. Do you consider me using tax law to benefit my situation a loophole?

[-] 2 points by brightonsage (4494) 12 years ago

There are more and more corporations (half) that are using pass through and they employ half of the employees in the country. Some of these companies using pass troughs are $multibillion companies with thousands of employees.

They say exactly what you say, "I am using a legal tool to lower my tax burden.I am using a legal tool to lower my tax burden." And, it is true.

Is half of the companies avoiding that level of tax by pass throughs, and a good fraction of the rest avoiding taxes by taking the profits off shore excessive. If everybody has a loop hole, who pays?

The idea of an S-corp is that it is a way to market services from quasi employees and no company value is created. If you can't sell the business for a significant amount, I would say you should be able to avoid the tax.

But if you could sell it for a significant amount, it would be like selling stock in a C-corp, you should pay the tax on the corporate profit and on the gain of the sale. It is about paying taxes on value that is created and remains in the business entity.

[-] -2 points by toonces (-117) 12 years ago

They are not avoiding taxes, they are paying taxes as required by law.

[-] 1 points by brightonsage (4494) 12 years ago

Laws that they got rigged to avoid taxation. What is it about the term "loophole" that you don't understand?

[-] -1 points by toonces (-117) 12 years ago

One mans loophole is another mans deduction. I imagine you took every deduction (loophole) you were entitled to last year...

[-] 1 points by Mooks (1985) 12 years ago

I operate my dental practice as an LLC and though my partner and I do not pay any corporate taxes, all our profit is split between the two of us and taxed as regular income. So you really can't say that no taxes are being paid, they are just being paid as personal income taxes instead of corporate.

And yes, I take every deduction I possibly can each and every year. I even hire a tax lawyer every couple of years to make sure that I am legally minimizing my taxes. It is foolish not to, especially considering how inefficiently our tax dollars are used.

[-] 1 points by brightonsage (4494) 12 years ago

I didn't buy any new ones. I don't lobby. And your attack is scurrilous. You resort to personal attack when you lose the point in question.

Check the definition of small business (hard to find) then check the exceptions that allow companies the size of Bechtel to claim to be a small business. Or SAIC or CH2M Hill or many others compromising the "half of all U.S. businesses and companies that employ half of the private sector workers are not federal income-tax-paying entities."

Equate that to me as a retired individual living on Social Security.

[-] -1 points by toonces (-117) 12 years ago

... or GE

Do you take every deduction available to you? ans... YES

I understand leftist believe that all money belongs to the government and that any implication that we, as citizens, should be allowed to keep as much of our money as we can can be construed to the leftist mind as a scurrilous attack, but the Constitution restricts the government from taking property that does not belong to them.

You are not taking advantage of loopholes, you are wisely keeping as much of your own money as you are entitled to.

[-] 1 points by ARod1993 (2420) 12 years ago

It's tax avoidance in spirit even if it's technically legal. I agree that in certain cases pass-throughs should be allowed to exist as such because there are organizations and businesses who legitimately need the status. That said, we need to get a lot stricter about who can register as an S-corporation or similar entity and who can't, and we need to enforce whatever we try to put on the books to deal with the loophole. Legitimate services with a real rationale for operating that way would be free to continue, but there would have to be some sort of a cap on firm value/capital above which all firms would have to register and pay federal income tax.

[-] -2 points by toonces (-117) 12 years ago

So, you feel you are a better judge of the laws written by congress or codes written by the administration than tax lawyers and accountants and IRS agents?

How do we solve this inadequacy amongst those tasked with codifying laws for us? Would your solution be for someone to dictate what is fair and what is not? What happens if you do not agree with the judgment of the Dictator?

[-] 1 points by brightonsage (4494) 12 years ago

Absolutely. And most of them will privately agree with me. It isn't inadequacy, it is corruption. You can abdicate your responsibility to inform yourself well enough to judge the situations we face, as you have obviously chosen to do. Then you salve your conscience by presuming that everyone with an opinion is similarly lazy and under qualified to match their judgement with the professionals involved. Not so. I have spent the time (I learned my economics from Alan Greenspan the guy who abdicated his responsibility as head of the Federal Reserve to regulate the mortgage industry), and I am not intimidated from criticizing his performance or that of the professionals you mention who been influenced by the money they get for misrepresenting the interests of the citizens of the US in general.

My solution has nothing whatsoever to do with dictators who pass out the corruption from one person, it has to do with a Congress who has sold out their responsibility for corruption from big business and rich individuals.

If we can get the money out of the process of electing and governing and we can get lazy people to learn what they should know to be informed voters, we can get a Congress that works for all of us.

Since that is going to happen, you should get busy on your home work.

[-] 0 points by toonces (-117) 12 years ago

The lazy people shoukd do enough homework to know that if you are following the law in regards to tax codes, you are doing nothing wrong. There are laws that you can not honor the spirit of, but tax code is not one of them. The tax code is an imaginary code invented by man to take money from citizens. If you (or your accountant) find a way to lower or eliminate your tax burden, you have done an honorable thing because you have kept your own money and denied it to a bureaucratic machine that will just waste it.

[-] 1 points by brightonsage (4494) 12 years ago

There are plenty of things that you can do legally that are not honorable and if you get the law changed to say that you alone may kill your neighbor and take his property you are still wrong and dishonorable. Making the rules unfair is every bit as bad as breaking a fair rule.

All tax money is not wasted. Government is necessary for a civilized society. Conversing with you is an obvious waste because you want to split semantic hairs rather than solve societal problems. Good bye.

[-] 0 points by toonces (-117) 12 years ago

Abiding by tax law is not killing a neighbor. One is a crime against religious morality, a crime against God. the other is defending yourself from legalized theft of government. Even if you were to cheat on your taxes rather than obeying the letter of the law, it would be a crime against a construct of man, which has not the eternal ramifications of a crime against God.

[-] 1 points by brightonsage (4494) 12 years ago

Let me quote someone you may have heard of, Newt Gingrich, "Just because you have a right to do something doesn't mean it is the right thing to do." He was forced to resign by his peers and fined for misconduct. Google it.

The GOP 1%er's have made a hobby of legalizing theft and have extended it to legalized tax avoidance. It isn't something to be proud of.

Morality and the law have little to do with religion for you either, other than coincidence, since you pick and choose which parts of each you want to observe and ignore the rest. Using the loopholes all around, so to speak. I would be satisfied to see you only have to pay while you are alive.

You will look anywhere and twist any phrase for an excuse to exploit others and take pride in it. But like Nixon, you are not a crook, only because you haven't you been convicted yet so you can you pay your debt to society. Meanwhile, I am sure you are busy: "Therefore I command you to be openhanded toward your brothers and toward the poor and needy in your land.: Generosity being your strong suit, and all.

[-] 0 points by toonces (-117) 12 years ago

Newt resigned because he has some semblance of a moral code. He cheated on his wife and when this fact was made public by the liberal media who were out to extract revenge for the outing of President Clinton, who had cheated on his wife by engaging in sex with a subordinate intern (and who did not resign his position because he did not have any semblance of moral code). The Democrat party has no moral code so they had no reason to ask the President to resign after he was caught having had sex with that subordinate intern, having her engage in a sexual performance where she inserted a cigar into her vagina for the pleasure of President Clinton. When exposed, President Clinton lied to the American people where he wagged his finger in our noses and denied the act. He then perjured himself by lying under oath, and was subsequently impeached by congress. The Democrats did not ask him to resign after all this malfeasance because the Democratic party has no moral code or compass... You can google that.

Like the Deomcrats 1% have done with Solyndra and general Electri and General Motors and Chrysler?

Killing is a crime against God... Cannot be argued

Evading taxes (not complying with the tax law, mind you) is a crime against a construct of man... Also cannot be argued.

Following the law is not exploiting others.

You are right, I am not a crook.

You are not worthy of being able to command me to do anything. You are not God. I work for him and I give as much as I can to those who I feel need or deserve my help.

Criticism being your strong suit, have you examined your generosity?

[-] 1 points by ARod1993 (2420) 12 years ago

You don't have to be a tax lawyer to see that there's something very wrong when companies the size of Bechtel are paying zero taxes, and when a specific series of provisions make that possible, it's pretty much self-evident to anyone who bothers to pay attention that those provisions require some form of amendment. You don't have to be a specialist to notice these things any more than you need to be a plumber to notice a leaky sink or a graduate student in computer science to notice that a particular program is slowing down your computer.

As to the results I am looking for, I want to see the flagrant abuses stop completely with as few incidental effects on pass-through entities complying with the spirit of the statute as possible. There are simple metrics (such as the value of a firm independently of the partners and all assets held in the partners' names) that give a rough indication of when something is a legitimate LLC, LLP, or S-corporation, and rough guidelines should be laid down based on those metrics. Beyond that, it probably will take a team of specialists to work all the kinks out, and I leave the tweaking and fine-tuning to them.

[-] 1 points by brightonsage (4494) 12 years ago

You are exactly correct, in my view. "Small business" that is reference as the "job creators" is often mislabeling. It give them undeserved preferences on government contracts and many other aspects. Is is difficult to find the definition and when you do, if you aren't shocked enough already, start looking at the exceptions to that definition for another set of loopholes.

[-] -1 points by toonces (-117) 12 years ago

So, as long as you are the dictator, it is okay to punish companies for following the law.

[-] 1 points by ARod1993 (2420) 12 years ago

Now you're just being deliberately obtuse. The only reason that flow-through entities exist in the first place is because it is understood that certain kinds of firms have no intrinsic value in and of themselves, but rather act as a conduit for value to their partners and investors, and in those cases there's nothing there to tax. That's not the word of any "dictator" but the only logical reason to insert the exception to begin with. It thus stands to reason that once there is something there to tax then it should be taxed.

[-] 0 points by toonces (-117) 12 years ago

If they are not breaking any law, they are not in the wrong to structure their company in a way that allows them to keep as much of their money as they can. If you think that all money is the governments money, you are the one who is being obtuse.

[-] 1 points by ARod1993 (2420) 12 years ago

Trying to play cat-and-mouse with the government is normal, but at that point the government has the right to amend the law to deal with loopholes as they pop up.

[-] -2 points by DependentClass (19) 12 years ago

No, not at all. But see, liberals, they start with it all belonging to the government and they're offended that you might want to keep some for yourself.

[-] 0 points by FrogWithWings (1367) 12 years ago

Just the cost and tedium of being and staying incorporated takes an unpleasant lump off the top of a small business which takes care of a handful of people. Many billable productive hours go strictly to feed and keep alive that veil.

If you live in a state with shitty homestead exemptions, you just about cannot be in business without the corporate protection, that is if you have anything to lose.

[-] 2 points by brightonsage (4494) 12 years ago

II have been there and I hear you but when we have GE and Bechtel (S-corp.) paying no taxes, they have to come from somewhere. I would suggest lower rates for real small businesses, and higher rates or closing loop holes on the big ones who masquerade as small businesses. The top corp.rate is 36% but the average pay way less, less than half of that rate. See my comment above.

They also are getting away with screwing their customers and their shareholders and, yes, the taxpayers. They are protected too much from responsibility for their actions and don't even pay for it.

II have been the small business and I wouldn't mind paying the taxes that would result from adjusting the rates and closing the loopholes for the big businesses that are buying loopholes you can drive an aircraft carrier through. A hedge fund with 25 employees and a $billion under management isn't a small business.

[-] 1 points by FrogWithWings (1367) 12 years ago

I can't begin to imagine the cost of paying large braces of CPA's and specialized attorneys to prepare 50,000+ page ta returns. I have to wonder if it would actually be cheaper to just pay the damn taxes and let these people do something else useful for humanity other than exploit tax codes well beyond any rightful expectation of reasonable persons to comprehend and retain said tax code and statutes.

We should have reasonable laws of which anyone qualified to vote should be expected to comprehend. I doubt any one, HIGHLY TRAINED and formally educated in esoteric tax matters, CPA or attorney understands enough tax code to file 50,000 page tax returns on his or her own..... and know when it's signed

it reduces the maximum liability and fully complies with the absolute letter of all statutes and codes.

The other side is, factor in the cost of lobbying for these codes/loopholes and that is has been proven lobbying dollars have a %20,000 ROI, I'm guessing a most of those returns go to those preparing the tax returns and upper management, with the shareholders getting pennies by comparison.

[-] 1 points by brightonsage (4494) 12 years ago

There are plenty of good, fair tax simplification solutions. We just have to get the money out of the system of selling tax advantages like the Catholic Church used to sell indulgences (maybe they still are?) We now have plenty of historical data to model any tax plan to see what the results will be and of course it can be fine tuned, but you have to get the corruption out and keep it out. Passing a set of reforms and believing you can forget about it defies logic. Reform is a process without end because there are always those working overtime to re-rig the system. Being a citizen is hard work (as Bush used to say about things that he wasn't doing at all.).

We are in this mess because of laziness as much as greed.

[-] -1 points by slammersworldisback (-217) 12 years ago

Do you have idea about the rules and tax structure of S corps and LLC's....

considering your comments, the answer appears to be no...

The deficit is bigger because they are spending more, and the percentage unemployed, not because of tax rates....

[-] 1 points by brightonsage (4494) 12 years ago

Tax rates hardly matter if no one pays them. The average corporation pays around 14%, I think. It is certainly far below the 35%.rate. The deficit is bigger because over the last few decades more loopholes and temporary cuts have lowered the revenue actually collected. Also about 17% of taxes that are actually owed (with the loopholes) are not being paid. Fix these problems and then we will talk. I have formed multiple S-corps, LLC's and C corps. There are many large enterprises that are masquerading as small businesses to exploit the system.

[-] 0 points by slammersworldisback (-217) 12 years ago

there is no "masquerade" any size business can be any of those types of legal entities..there are no size limits....each of the categories offer a different set of benefits and liabilities......saying that they are exploiting the system is nonsense....and anyway, in the end, what does it matter how much a business pays in taxes...those costs end up in the price of the goods/services anyway and are paid by consumers in the end....all higher tax rates do is enable and enrich government......

[-] 1 points by brightonsage (4494) 12 years ago

I said "Tax rates hardly matter if no one pays them." not that what they pay doesn't matter. So, change what I said to what you wish I had said and counter that.

Does the fact that GE paid no tax make sense to you? There is a long list available on the net of the large recognizable companies that paid no tax. They may not have broken the law but they certainly made a large profit and didn't pay tax. Why? Answer: legal loopholes. They are exploiting the system by looking for (lobbying for) and getting the loopholes that they can slip through. Even some of the GOP has conceded this point. Even Newt said he didn't like rich guys rigging the system.

[-] 0 points by slammersworldisback (-217) 12 years ago

Well...specifically in the case of GE, GE finance lost a massive amount in the year they paid no taxes....plus, they are big cronies of Obama with their "green" technology....

Again....any level of tax on business is eventually paid by the consumer, so whatever the rate, we pay it.....

[-] 1 points by brightonsage (4494) 12 years ago

Some seem to pay it and some don't. I guess I will have too go back to the web and find some more numbers because too many people seem to think the defense of bad conduct is to throw up others bad conduct. Picking GE's CEO as the jobs guy was incredible stupid. About the only worse choice would have been the head of the Chamber of Commerce. Stay tuned, if you don't want to do your own research.






Sorry, full house, it is two thirds.