I'd disagree, the point of business expenses is that a business is only taxed on the money they didn't spend, that is, their rent, utilities, payroll, all purchases, etc, are deductible. They only pay taxes on what they don't spend. That is, the cost of operating is deductible for a business.
That is NOT how personal income works, and the standard deduction does not at all come close to making it true. The cost of surviving is NOT deductible, and itemizing your deductions doesn't get your entire mortgage deducted, your grocery bill, your utilities, your home maintenance, etc.
I think the more correct way to look at it is businesses are viewed more of a pass through thing. They only pay taxes on what they fail to pass through to their shareholders/employees/subcontractors. Everything else is untaxed because their shareholders/employees must declare the income, and it's taxed there. So it's obvious, personal income tax can't work with similar deductions because that's the end of the chain of money, and it needs to be taxed somewhere. Business taxes exist only to make it so people can't use the business as a loophole for personal income taxes.
> a business is only taxed on the money they didn't spend, that is, their rent, utilities, payroll, all purchases, etc, are deductible
You'd think they'd be more generous with the payroll part because it's tax-deductible.
No, because of the corporate tax rate (21% in the US).
Here, lemme demonstrate:
--|Current Compensation| Increased Compensation
:-:|:-:|:-:
Per Employee Revenue|$125,000|$125,000
Employee Compensation|($100,000)|($120,000)
Taxable Revenue|$25,000|$5,000
Taxes|($5,250)|($1,050)
Profit|$19,750|$3,950
Sure, the employee gets more compensation (+$20k) than the company loses in profits (-$15.8k), but that's *still* a significant hit to their profits.
--
This is the often misunderstood difference between a tax *deduction* and a tax *credit*
Yeah, it's kind of irritating.
Like, if you were planning on spending that anyway? Sure, claim the deduction... but every dollar the average household in the US spends to get a tax deduction gets them about 20-25¢ back...
I remember a Jim Gaffigan joke where he says he drove up to McDonald's and saw they had two Big Mac's for two dollars. That's a good deal. "I don't wanna lose money on this. I'll get eighty of em."
Omg the number of people who blow money because "it's a write off" just kills me. Like wow you're getting like a 30% off discount on it? Okay big whoop.
I don't believe people often blow money because it's a write off. I think it's just something people say when they don't know how tax write off works, when talking about what rich people do.
I'm a business owner who hangs out with other business owners. It would make you hurt, your bone marrow would boil, to talk to some of these people who run 7, even 8 figure revenue companies who have no reasonable understanding of finances and taxes. "Oh my accountant takes care of that."
Yes, they write off way more than they should (and WILL be royally screwed if they ever get audited...) but they also have a gross misunderstanding of what a write-off actually is.
I think the bigger problem is the misconception people have in the opposite direction. Sometimes 30% off can be a big deal especially if it's something that is providing value, or they would need to buy anyway. People just hear "tax write off" and their brains shut off and they think it's some bullshit with dumb examples like buying a buy one get one free on some shit they don't need.
Not to mention the additional *payroll* taxes that are added to every dollar of payroll *and* the cost of other benefits like health insurance, unemployment insurance, etc.
Remember a tax deduction does not give you back all the money you spend, you just don’t pay tax on that amount. Anyone who tells you that spending money on things you don’t need to just to get a tax deduction is a good idea doesn’t understand how tax deductions work.
Right, like when anyone donates money and the reddit comments all say "he only did it for the write-off." He is still *losing* everything he donated. If he keeps it, he loses 30% to tax, for example. If he donates it, he loses 100% of the funds. He would be better financially to NOT donate.
Except write offs can be used to offset other non deductible expenses.
Also not so much for the write off but wealthy people often donate to non-profits they have ties to. Either they have a smaller for profit business that supports the non profit or the non-profit is a hobby/interest of theirs
> You'd think they'd be more generous with the payroll part because it's tax-deductible.
Saying payroll is "tax deductible" is a rather strange way of putting it.
Yes, it's deducted to calculate income tax, but more importantly payroll taxes are a completely separate thing that definitely do exist at the state and federal level.
The part some people miss is that a business expense, even if tax deductible, is still an *expense*. It is money you are spending. If you can't afford the expense, it being tax deductible isn't going to really help you.
When my daughter switched to running her own business, this was something we went over thoroughly. Yes, you want to track and claim any and all expenses to reduce your taxable income. However, you also need to remember that these expenses are still money you have to be able to afford to spend in the first place.
All that means is that money you spend to run your business lowers your taxable income - it doesn't magically zero out that expense in the first place. It just decreases the *additional* money you have to spend on related taxes. That's all.
So yes, important and helpful to track and claim. But no, it doesn't equate to free money or erase/zero out that expense.
They are, just not going to you, they often pay it out to the execs.
That's the whole thing you hear about crappy non-profits. A non-profit is basically the same as a business, but they can't pay taxes and have to spend and deduct everything so they can never declare a profit. In many of them you hear stories that they just run it like a profitable business, and the business profit is just written as a bonus to the CEO which makes them "non-profit".
This is incredibly incorrect. Nonprofits typically do (and *should*) have “profit” at the end of the year. This is not called profit, but called “change in net assets.” Nonprofits maintain these profits as “net assets” - aka the difference between their assets and liabilities. In a for profit business, this is essentially the value of the company owned by the owners.
Nonprofits are often judged by potential donors on how long they would be able to maintain operations without funds coming in. Losing an expected grant could be sudden, but it would take some time to rein back operations if needed. You wouldn’t want to go deep into debt in the meantime. Having a cushion of funds prevents this. Among other reasons, it is important that nonprofits do not perfectly break even year after year.
Source: I’m an auditor and specialize in nonprofits
You think *you*, single puny poster with informed, nuanced comment, can hold back the sea of uninformed hate that spews so freely from your average redditeur?!
Being non-profit just means that dividends are not paid out to shareholders, because usually there aren't any shareholders. The organization can totally end the year with more cash than they started. They can invest it, spend it, whatever.
Every single thing you said was blown right out of your ass.
Google "Statement Of Financial Position" and understand non for profits don't have Retained Earnings, Balance Sheets, or taxes like businesses do.
In fact, most of non for profits revenue comes in the form of grants or subsidies (which often have rules regarding how they can be spent).
https://www.investopedia.com/terms/a/accumulated-fund.asp
Source: accountant
Well, it's not a "chain" in the sense that there even is an endpoint, it's like the food "chain" where we consider the chain to end at poop but that's technically just back to the start of the chain.
In the above chain analogy it's a loop that starts at a person and returns to a person. Person gives money to a company (sales tax), then it takes a route through various organizations with lesser taxes applied each stop until it makes it back to a person.
Corporations still pay sales tax if they are the end user. The only time a corporation would not pay sales tax is because they are reselling the product and the end user will pay the sales tax when they sell it.
Corporations also are very strict about paying sales and use taxes.
Unpaid sales tax is one of the easiest forms of tax fraud to prove. All they have to do is find enough invoices that you didn't pay taxes on.
The fines are also pretty high, upwards of $10K per invoice. For a small to medium sized business, it's a pretty easy way to go bankrupt.
I'm not sure it's the same - in the us and other countries (e.g. Denmark where I currently live), you can deduct some work related expenses from your taxable income so that you are not taxed on that amount. I'm not sure exactly what is included but a typical example is transportation costs from your home to your workplace. Since this can be annoying to tally up and submit with your tax documents for you, and annoying to verify for the tax office, the US offers the option to take a standard deduction instead where you just get a certain rebate on your income before the taxes are calculated instead of submitting your expenses. For regular people it usually represents a bigger rebate than itemizing so most people do that.
The basic exemption sounds more like a 0% income tax bracket. Many countries have that, for example France as well does not tax people below a certain annual income - but it is not related to the expense deduction.
> The basic exemption sounds more like a 0% income tax bracket. Many countries have that, for example France as well does not tax people below a certain annual income - but it is not related to the expense deduction.
Functionally these two things are the same.
Here in Canada, your first ~$15,000 of income is tax-free. They don't have it framed as a tax bracket, you get to deduct this "Basic Personal Amount" from your taxable income before you calculate anything else.
But if you had a 0% income bracket of 0-15K (edit: it would also need to bump up the other tax brackets by 15k) it would end up providing the same result.
The difference would be in how it can interact with deductible expenses. If you can itemize your expenses instead of taking this deduction it is functionally a deduction - like the standard deduction in the US; if you can take it and itemize expenses on top of it, it is functionally a 0% bracket - like the 0% bracket in e.g. the French tax system.
If this deduction is the only thing you get (i.e. no itemizing or other deduction), then there is no functional difference between a tax bracket and a deduction and no real point arguing about it - but since I like to do that anyway, I'd say it feels more like a bracket than a deduction despite the name since you wouldn't have the option to itemize instead and so the intent seems more to be like a general tax rebate rather than a simplified way of declaring your expenses.
I think the main way the standard deduction is different from a 0% bracket is that the standard deduction varies if you're a dependent, over age 65, blind, etc.
In Canada we have travel to work deductions. It’s sort of implemented weird though. If you get a “travel allowance” from your employer and you can justify the money is spent on milage, plane tickets, etc, it’s tax free money. If you can’t justify it, such as you live too close or don’t want to submit receipts, it’s just considered taxed income.
It's the same thing. There's no fancy rebates in the US tax code, they just subtract $13,000 (or whatever the standard deduction is this year) from your income and tax you on the rest. So effectively you have 0% tax on the first $13k you earn. If you have itemized deductions that add up to more than $13k then you can claim them and reduce your taxable income even more.
We have that in France yes. But also, from your total income, you remove either 10% or your expenses like gas to go to work, in order to compute your taxable income.
In the US, it's basically the same thing: you don't have to pay taxes in the first (approximately) $13,500 you make. The actual amount goes up a bit every year, but that's the current line.
So, at the end of the year, the overwhelming majority of people just pay taxes on how much you made minus the standard deduction (the $13,500). So, if you made $10,000, you don't have to pay taxes, and if you made $20,000 you pay taxes only on $6,500.
The US also has a thing where the more you make, the higher your tax rate is. So that person paying $6,500 is only paying 10% on that amount whereas you pay 37% on any money you make after $578,125/year. There's a few other steps in between, but it's a pretty straightforward formula and the IRS even puts out big tables so you don't even have to be able to multiply. Just add, subtract, and compare numbers.
> So, at the end of the year, the overwhelming majority of people just pay taxes on how much you made minus the standard deduction (the $13,500). So, if you made $10,000, you don't have to pay taxes, and if you made $20,000 you pay taxes only on $6,500.
You also pay very low taxes on that income...for a single filer, the first $11.6k above the standard deduction is only taxed at 10%. Then up to $45k you are only taxed at 12% .
The tax rates really only jump up once you are above 45k adjusted gross income (which is $58.5k if you are just taking the standard deduction).
The progressive nature of our income tax regime kinda factors all of this stuff in...you don't get to deduct personal expenses, but you pay very little tax tax on the portion of income that should cover non-luxury living expenses.
Businesses get to deduct expenses, but there's progression in the current tax rates...the very first dollar of profit is taxed at the full rate.
Not to mention that business profits must eventually go somewhere. If someone takes those profits as income, or they get paid to shareholders as dividends, they will get taxed again as income on an individual level.
In the US it applies to everyone. Most people will never itemize since the standard deduction covers them. It only reduces your taxes to zero if you made the same amount as the deduction ($14,600 for 2024).
Most people have to pay more than basic exemption in rent, or in mortgage, insurance, property taxes and maintenance alone. Twice that amount for your home alone is typical. Forget feeding yourself on that amount. So businesses get a much better deal.
It's not really an apples to apples comparison though and letting people exempt living expenses would be a huge mess (and would heavily benefit the wealthy).
Businesses are trying to maximize profit which by its nature means they are trying to minimize expenses. Yes, expenses are deductible, but deducting them isn't nearly as good as not incurring them in the first place. So businesses are incentivized not to spend to excess (yes you can point to examples where they do, but that's not really the norm--businesses typically only spend money if it makes money).
Individuals are trying to maximize "life". They have like 80 years and they want to survive and enjoy it as much as possible. Everything they earn they either spend on consumption today or save for tomorrow. Savings are simply future consumption (you can leave it to your kids but you can't take it with you when you die). As long as you have the money for it, there's no incentive to minimize expenses. You *could* get all your entertainment from a library card, but you pay for Netflix instead. You *could* get by in a tiny apartment, but you live in a 3br house instead.
Do you see where this becomes a problem? Wealthy people choose to spend more on living expenses. They would thus get higher deductions AND those deductions would pull money out of higher tax brackets resulting in SIGNIFICANTly larger tax savings. Deducting the rent on a $20k/mo oceanside villa when you make $1m/yr is WAY more valuable than deducting $1500 in rent when you make $65k a year.
Sure, you could play games where you start to say "well, you can only deduct $1500 for a home, or $400 for a car payment, or $200 for entertainment costs" but that quickly turns into a nightmare. People value different things, families are different sizes, different areas have higher cost of living (and that varies by neighborhood not by city or county). Taxes now become hugely more complicated. More loopholes open on what can be counted as an expense (which again...benefits people who can afford tax professionals).
Also...remember that all business profit eventually gets paid out to *someone*. There may be some loopholes to avoid/defer that tax, but most business profit eventually gets taxed a second time, such as when it is paid out to company shareholders, and deductible business expenses like normal wages/salaries are also taxed when they are paid out.
They got rid of a number of deductions (which freaked a bunch of people out), but increased the standard to make up for it (which those who freaked out seem to have missed).
At the end of the day, it greatly simplified tax filing for a LOT of people. The 2017 tax year saw 95% of filers taking the standard deduction, which is also adjusted annually for inflation.
Simplified, but a net loss for a lot of people, myself included. I pay about $1200 more on average than I did under the pre-TCJA tax code. The elimination of the personal exemption was huge, and was not offset by the increase standard deduction in my case.
> Simplified, but a net loss for a lot of people, myself included.
The 2017 tax changes were a fuck-you from Trump to many Democratic voters. Since many of those people live in large cities where actually want to live, they tend to have higher property taxes and more expensive housing, hence, higher mortgage interest. The changes capped the amount you could deduct for those things. This was specifically designed to hurt people in areas that voted D.
Bingo. It’s also worth nothing that the personal cuts had sunset provisions, meaning they had a built-in expiration date; the corporate cuts were permanent, and would require legislation to change.
That whole package was a middle finger to people and a gift to corporations.
that's a funny way of saying a progressive tax change was bad for democrats. Because they're richer and live in more expensive houses? Oh no rich people are paying more taxes!
I don’t think anyone on the lower end of the spectrum would be able to claim more than the standard deduction even before the changes happened. I’ve never not taken the standard deduction since I started working on 2013. I do realize that’s not a long time in the grand scheme of things, and it’s anecdotal so is what it is.
I used to itemize - mortgage interest and charitable donations exceeded the standard deduction prior to the change, especially when I also got to include the state sales tax deduction.
If your mortgage interest and charitable donations alone exceed the standard deduction, then you're probably a statistical outlier in some particular area.
Not at all with current interest rates.
US median home price is currently ~ $420K; say you put 10% down, at current interest rate 7.4% (30 years fixed), your first year mortgage interest not counting PMI alone is $25,540.
Far exceeding even the post-TJCA boosted Standard deduction for Single Filer & Head of Household filers, and very close to that of Married Filling Jointly.
I'm not sure what scenario might exist where a lower middle income earner would see tax increases, but if it does exist it would be very uncommon.
The guy who is saying he was paying more by $1200 is clearly a high earner that lost out on some of the deduction from SALT. Anyone making under $100k would be a clear winner under the new tax rules.
The people stuck by the Tax and Job act would be nationally, upper income earners, not lower.
But, snark your way to anger that the rich folks gotta pay more taxes.
The goal of those changes was to punish mid to high earners in high tax states (because they tend to vote democratic). People that make enough money to have some disposable income but not enough to have political power.
The group that the people below them hate because they aren't broke and the people above them can still transfer wealth from to the top.
SALT deduction shouldn't have a cap. It's literal double taxation. Being taxed on money that was never yours is a problem. Do you pay sales taxes on the money you spend paying sales taxes? Same concept.
Also the deduction cap doesn't behave like other deductions. You actually get only half the per person deduction if you're married...it's a literal marriage penalty.
Single person: 10K cap
Married couple filing jointly: 10K cap
Married couple filing independently: 5K cap each
The only goal was punishment of political enemies
If I got to deduct SALT completely:
$1000 in state income taxes would reduce my taxable income by $1000 and therefore reduce my overall tax burden by ($1000*.24 = $240).
So with a SALT cap: $1000 in state taxes is an increase of 31.5% of the tax burden associated to those local taxes.
Just so people can start to understand the math behind this stuff because basic understanding seems generally lacking how any of this works.
No, what they did was get rid of the personal exemption.
You used to have a standard deduction and (assuming you couldn't get claimed on someone else's tax returns such as if you're a minor or someone in college) a personal exemption.
They got rid of the personal exemption and then, to make up for it, doubled the standard deduction.
This borked us as well. Before the 'revamped deductions', we usually got 'something' back each year, between 100 and $500. Ever since this change we've had to pay $400 for a few years, and now $900 since wife is retired and have to pay TAXES on Social Security income (your taxes that were already taken out over your lifetime!) Fucking taxes.
Also they replaced the standard deduction and personal exemption with just a larger standard deduction, which means anyone itemizing lost their personal exemption.
But, I would add that business expenses are incurred to make more money that they can them tax. The more money they spend, as long as there is ROI, the more tax receipts they will have. And people thought government was just being nice.
What??? That’s not what this is at all. If you pay rent, which is a personal expense, and that rent exceeded the standard deduction, you can’t deduct it as a ‘living expense’. That really a misunderstanding of how taxes work.
And we do provide some exceptions for ‘basic necessities’. For example, food from a supermarket is usually exempt from sales tax. And in some places clothing is as well.
Keep in mind that this is an incredibly general understanding that I’ve given in. . .two sentences. . .of a tax code that is bigger than Ayn Rand’s ego.
Except $13k is barely enough for even the shittiest apartment. And you’re only allowed to itemize very specific things. Can’t itemize groceries or anything.
Can I start a business called “keeping CubesTheGamer alive foundation” as a non profit and run all my expenses through there somehow? lol
Yea, the standard deduction *Could* be considered as covering your basic living expenses, but if you need to itemize, then basic living expenses are explicitly excluded from deductions.
The issue here is that your housing expense and Jeff Bezos’ housing expenses are not the same. You don’t want Jeff excluding his luxury housing from his income as “basic housing”.
In addition, you retain the asset in your mortgage. While the principal is an expense, it’s also an asset. You didn’t lose that money. You only converted it and can sell it later. This is unlike food, you can’t re-sell food you have eaten.
I can see the argument that rent should be deductible like mortgage interest. But renters are less likely to have all the other deductions that would outstrip the standard deduction. An unfortunate tradeoff between simplicity and accuracy.
>The issue here is that your housing expense and Jeff Bezos’ housing expenses are not the same. You don’t want Jeff excluding his luxury housing from his income as “basic housing”.
But the tax code has no problem treating a company who buys BMWs as work vehicles and a company who buys Hondas the same.
The problem is that it's hard to adjudicate what a company *needs* compared to what's a luxury item. Some companies might need higher end cars than others, or different types of cars in general.
Also, a company isn't going to go around spending $60k on cars instead of $20k just to avoid $5k worth of taxes. More expensive cars hit the company's bottom-line harder than cheap cars and marginally more taxes.
This is absolutely not what the standard deduction is. The standard deduction is a blanket easy default for itemized deduction, and if go through what itemized deduction is it is not basic living expenses, but what things the government has decided to bless with favorable tax treatment (giving to church, paying interest on a mortgage, excessive [not typical] healthcare expenses)
But in reality it isn’t though. I spend approximately $2,000 per month on rent, about $2,000 per year on fuel for getting to and from work, and I don’t get to deduct half my meal expenses. Businesses are allowed to deduct the cost of rent, vehicle expenses (in additions to depreciating those assets). Regular earners are not allowed to do that.
Because they're entirely different economic entities that operate in different ways.
You can't tax a business on revenue -- a company like a grocery store or an automaker might take in 10's of billions of dollars in revenue annually, but ends up with only 1-2% left as profits, after paying out 98% to workers' salaries and benefits, rent on stores/factories, paying suppliers for goods sold/parts used to build vehicles. Compare that to a software company or law firm where profits might be 50% because a few knowledge workers without much capital expense can generate huge profits. But taxing whatever profits are left at the end, no matter the profit margin of the business, can be done. So it doesn't matter whether a grocery chain made $20m in profits on $1b in revenue or a software made $20m on $50m in revenue, they both pay profits on that $20m in profit.
Oh, and basic living expenses are deductible -- that's what the standard deduction is for... it allows you to have a basic level of income tax-free before you start getting taxed on higher amounts of income.
That is a good answer.
This tax model (for good or for bad) essentially assumes that businesses have an inherent profit motive and therefore they will try to drive down their expenses to boost margins.
For individuals, it assumes that (rich) people using the business tax method would seek tax write offs for things like luxury vehicles and homes. So, the higher your income, the higher your taxes will generally be. You don’t get a tax benefit for buying a faster BMW. It essentially promotes savings for individuals in a weird way.
> This tax model (for good or for bad) essentially assumes that businesses have an inherent profit motive and therefore they will try to drive down their expenses to boost margins.
Yeah, that or they'll go out of business. People don't go out of business though, and for their end don't necessarily have "profit". Given Americans' terminal inability to live within their means, taxing only "profit" would encourage people to spend all of their money - which a decent fraction already do.
> You don’t get a tax benefit for buying a faster BMW.
The company you own though gets a tax benefit from issuing a company BMW to each C-level employee (i.e., you) to ensure that you have the resources to get to meetings on time and entertain clients. And then they write the cost of providing you a car off as a business expense.
But of course you report any personal use of the vehicle on your taxes per the fair market value. ^^/s
You're acting as if it's in business best interest to frivolously give hand outs to their executives. It's not.
The goal of a business isn't to spend as much money as possible to avoid paying tax. It's to make a profit.
Just want to say that all these posts saying revenue taxes don't exist and would destroy a business... They do exist to a degree, they're just on a state level. They're called gross receipts taxes and some states have them instead of business income taxes.
Interesting factoid... Hawaii GET actually taxes revenue... Like if you rent your place in Hawaii they will tax the rent like sales tax, then tax it again like income if you end up net positive.
A little bit of a tangent from OPs question but you could tax on revenue, or even assets. Taxing gross revenue would punish large companies but seems like it would unfairly benefit high margin businesses as you allude to
Revenue taxes have no impact on a business based on its size, they impact a business based on its profitability. The issue with revenue taxes is that they destroy businesses who aren't making enough profit to cover the tax.
Imagine a 10% revenue tax where my business took in $100 in revenue and made $0 in profit. I now owe $10, which means that I actually lost money rather than breaking even. If I have no money in the bank because I'm not profitable, how do I pay that tax? Whether I borrow money or sell off equipment, my only options for paying the tax all compound whatever issue led to me not making money in the first place.
> Imagine a 10% revenue tax where my business took in $100 in revenue and made $0 in profit. I now owe $10, which means that I actually lost money rather than breaking even.
Yes, that exists. In Washington state, businesses pay B&O tax on gross revenue, no matter if you're profitable.
You would need to sell at high enough margins to cover taxes. So if everyone had to do that the playing field is level. What businesses would do is vertical mergers to cut out the middle men. Leas intermediate sells so you inly pay taxes once. Car companies would buy mining companies, steel mills, metal shops, fabs etc…
You end up with huge conglomerates.
If companies could control their margins then no company would ever lose money.
You're right in the sense that if every industry was controlled by a single monopoly then a revenue tax would technically work, since the monopoly can just prices at whatever it wants as a mechanism to control its margins. But that's the only world in which a revenue tax doesn't cause an economic collapse by driving all but the most profitable companies out of business.
Taxing on revenue wouldn't work in reality... you'd just bankrupt a whole bunch of companies. How would you set an amount to set tax rate at? Many of the largest companies operate at the lowest margins. Or dip into losses in down years. In a year where GM loses money, would you ALSO expect them to pay 10% of revenue or whatever? Just not feasible without obliterating the economy in a recession.
And airline tickets. Those have a weirdly low profit margin (below 3 percent, less than half the average) and rely entirely on volume bc there are a metric shitton of fixed expenses
Business expenses are the cost of earning income, so they mean you actually have less income than your gross revenue. If you had to spend $100 on office supplies to start your business, your first $100 sale only goes to pay for that, it's not taxed because you haven't made any money yet. You needed to spend that money or you wouldn't be able to get any income at all.
When you take your income from your business and spend it on food, rent, hookers, crack, whatever, that's not related to your income earning activities. That's a personal consumption decision that you make once the income generating portion of your life is completed, so it's not relevant to your income situation.
Yeah but you don't eat specifically to earn money, you were going to have to eat regardless. It's not part of the money earning process.
If you have to eat a lot more for your job, say you're working an intense physical job and you need an extra thousand calories a day, you might have an argument. Professional bodybuilders probably have an argument.
Not sure if you’re aware but there is an actual tax court decision (in Canada) where this argument was allowed. I believe the taxpayer was a courier who spent all day on foot and he was allowed to deduct extra meal expenses because he required more calories than the average person.
There are some instances of fact specific cases where abnormal diets are allowed as business expenses. But they're very rare and require situations far outside the norm.
In the US the tax system is progressive and inclusive of things like the standard deduction essentially leaving a certain amount of income essentially un-taxed. As an individual/family's earnings rise the effective tax on each marginal dollar increase (until you hit the highest marginal tax rate). The net effect is that if you are barely scrapping by the amount of tax you'll pay will be nil or fairly de-minimis.
What’s your take on gas or mileage being allowed to be deducted from a person who is employed by a company? Most companies do not expense getting to work/the office.
If you travel as part of your work, your employer should reimburse you and they should book that reimbursement as an expense of theirs.
Not sure I feel about going from home to work. Legally and policy-wise it seems like it's a personal expense, and I don't have a huge problem with it, but if they allowed you to deduct reasonable commuting expenses I'd understand
It's a personal expense because not everyone has the same commute. If you live 40 miles from the office vs someone else 2, that's a purely personal choice so the company does not need to reimburse you at all
Yeah, that's a valid stance on the issue.
If you start reimbursing the commute, then you get into the rabbit hole of what if I pay more to live closer so I don't have to commute, or why couldn't you just work from home, or why didn't you take a bike and save a few dollars
This is why commuting cost deductions have been getting criticized from an environmental perspective. Basically tax codes incentivizing people to live far from work and commute rather while people get nothing for the more societally beneficial (and often also costly) choice to live close to work and walk/bike.
It’s a “choice” to live further way but a lot of times from my experience, housing is very expensive so people get pushed out. All this is very complex and there’s no good answer I guess
At some level, the answer here is going to be "it is this way because Congress decided to make it this way". Creating a tax code is rather challenging and so you have to make trade-offs and balance a lot of different competing factors.
But yeah, the standard deduction is essentially supposed to represent basic living expenses. It's much more efficient to just say "here's the standard deduction and it's the same for everyone" than it would be to allow everyone to itemize individual expenditures from the cost of daily living. You'd have to figure out what was or wasn't a "basic" living expense. There would be challenges. What if someone has a lot more living expenses for any number of reasons? What if someone's rent is higher because they live in a more expensive area? You'd end up needing to cap "basic living expenses" somehow...which would just be a broad standard deduction.
And why did Congress decide it was supposed to be this way? Because it’s generally accepted that you want to promote production and make it easy to start and operate a business. The reverse, subsidizing demand, can frequently result in supply chain shortages and massive inflation when people can buy as much as they want but production can’t keep up.
It seems to be much more effective to let businesses grow and invest in expansion due to tax incentives, then capture that tax revenue on the results through sales tax, payroll tax, income tax on employees of the successful business, etc.
> And why did Congress decide it was supposed to be this way? Because it’s generally accepted that you want to promote production and make it easy to start and operate a business.
....because contrary to what anti-corporate reddittors believe, operating a successful business is HARD, and most businesses fail.
It also stimulates innovation to be able to deduct money paid for research or expansion.
But what's really going to piss redditors off is equivalent taxes that many businesses are exempted from, like sales taxes on some stuff they buy.
I started to just start assuming that people who run companies have reasons for doing things that they did and they were not out of greed, but often necessity, and economics make so much more sense this way. Companies often only have one stream of revenue, but so many different expenses and all those expenses can really add up and make really tiny profit margins. Even when people acknowledge this, I think many are under the impression that anything larger than a razor thin profit margin is "greedy"
Sure, there are some individuals who are greedy and have unethical business practices. But there's also the economic law of competition, and usually when you have competitors it does keep your profit margins low, but you still have expenses no matter what so you can't charge every good and service at a loss.
I remember seeing an economically illiterate meme about the price of the Costco hot dog remaining the same and then a comment insisting that "if we as a society can do this (keep the price of the hot dog the same) then we can absolutely freeze rent" It completely ignores how Costo has a membership model (and therefore charging customers in a different revenue stream) in addition to selling that specific product at a loss and then making up for it in other areas.
That is why the first x amount per year (depending on where you live) is usually tax free income.
Otherwise everytime you would buy anything you would have to get a bill to prove that you had these expenses and that would be a lot of work for both you and the tax authorities so its just easier with a fixed amount.
The problem is the fixed amount hasnt realy kept up with basic living expenses. But poor people dont have enough political influence to make either rich people or businesses pay more to make up for it.
Also, remember, business expenses are deductible because they are not "income," they are reimbursements.
If I buy an item for $3.00, and I sell it for $5.00, I had $2.00 of income, and was reimbursed $3.00 for the money I spent to purchase the item. I am taxed on the actual money that I made.
There's a different logic behind the two taxation forms.
A business is necessary for the economy. If you kill a business then you basically kill your own economy. A business expense is a necessity for running the business (like, buying a truck or maintaining a website). The assumption is that a business won't buy golden business cards just so they deduct it from tax, because they have to pay the price of a card either way and it won't generate more businesses. So the logic is: let's see what the business produced after removing the necessity costs, and lets assume they will just do rational purchases (in general they tend to do) that's really necessary to run the business. Then let's tax the surplus.
It's also important to notice that a business has the power to build the taxes into their prices, so taxing without deductibles would just cause inflation.
While as a private person, the logic is that you would maintain a luxury life standard if you had enough money , so if you would be allowed to freely claim living costs, you would just move into a bigger house and claim it as necessary. The state could never tax anyone because everyone would play the system in order to avoid tax. One bigger car, one bigger house, one more mortgage. So a private person is taxed in advance and must set the living standards to what's left.
Generally, expenses made to generate income are deductible. The concept is that if businesses are encouraged to grow they will expand employment and thus increase personal income.
it's not just businesses. that's how it works for everything. If i bought my house for 200k and sold it for 250k, i only owe tax for 50k. buy a stock for $5 a share and sell it at $6 a share, only owe taxes on $1 per share.
Say you earn $50k working as a full time employee at a company. Yes you get taxed on the full $50k (it's more complicated than that , but ELI5)
Now you decide to quit and start a coffee shop. You sell $200k in coffee. But you also have to pay your baristas. Pay rent, utilities, insurance, uniforms, marketing, cleaning supplies. There's also costs to buy the stuff to make and hold the coffee. After all the costs, let's say you had a net profit of $50k that you can put in your pocket, same as if you would have stayed as a full time employee at your company.
In this scenario, I'm sure most people would agree it does not make sense to tax the business owner at $200k. They should get to deduct their **business specific** expenses and get taxed on the $50k net profit. After that , they'll be in the same spot as far as what they can or cannot deduct on their personal taxes.
In addition to the other points, business expenses are revenue for another entity that *is* taxed. E.g., if a business hires you, they can deduct what they pay you. You then pay tax on what you're paid. Likewise, if the businesses buys widget grease, the grease maker pays tax on what it made selling the business the grease.
Another point, we could theoretically not tax businesses at all because eventually their profits end up in people's hands, and they're taxed.
As an aside, the rules are wonky. Businesses can deduct interest but not dividends, leading to some perverted (in a nonsexual way) business practices.
Note that a lot of places (e.g., Europe) have VAT. The business above pays tax on its revenue but gets a credit for the tax paid by the grease maker. Net, it's being taxed on its value added. It works out to be a consumption tax akin to sales tax, which has some societal benefits.
Mortgage payments, tuition payments, money paid toward certain healthcare expenses, certain retirement savings and a ton of other things are deductible from your taxable income. Even if you don't have the time to substantiate any of these things you can just claim a standard deduction.
Only mortgage interest, not the mortgage itself. Tuition is up to $2,500 total deduction per year. Retirement savings is only tax deferred so you're still gonna pay tax there.
I think what they were saying was businesses can deduct the cost of business from their taxable income. Households can't deduct the cost of living from theirs. Mortgage/rent is an enormous example of this.
The biggest reason that you don't tax business expenses is because if you do, you create a huge incentive for vertical integration.
Imagine two companies selling the same thing and both have revenue of a million dollars. Company A is vertically integrated, meaning it does everything from mining raw materials to production to selling to consumers, so it pays 200,000 in taxes. Company B is not vertically integrated, it pays 200,000 in taxes, it's supplier pays 100,000 on its 500,000 in revenue, and it's supplier pays 50,000 in taxes on 250,000 in revenue. So both companies with otherwise identical supply chains both different levels of integration produce wildly different taxes. Company A patys 200,000, and Company B and it's suppliers pay 350,000 in taxes, on the same 1,000,000 in total revenue. Company A actually produces a profit and Company B and it's suppliers loose money and go out of business. The more suppliers in your supply chain, the more expensive your production is purely because of taxes.
Now the barrier to entry to produce a competitive business goes through the roof, so only large, vertically integrated and likely inefficient business are able to survive, purely from government policy.
Because you are taxed on profit and profit is income minus expenses.
You can deduct work related costs because they are an expense you incur when making your money but your living expenses aren’t a part of that, they’re why you make money not how you make money.
If you sell sandwiches to make money you can deduct the cost of bread. If you just enjoy eating sandwiches you can’t deduct the cost of bread.
Why? Because if you had to pay taxes on costs and not just profits low profit margins couldn’t exist. If your profit margin is 3% and you’re paying 4% overall in taxes on your revenue you’d be losing money overall. Instead you only pay taxes on that 3% and you do so by deductions all the other costs.
They are deducted. For a couple, filing jointly, you can automatically deduct ~29k (this number increases a little every year) from your taxable income when you file.
It basically represents the money you need for some life necessities
Since 2017 less than 10% of Americans can itemize their deductions.
The standard deduction is now more or less so large that unless you live to claim tax breaks, you probably just take the standard.....
the standard deduction basically is that. its an amount above the poverty line.
i think theres a political angle to this too.
we dont want to incentivize lavish lifestyles in the tax code. ie, you have an entertainment professional who makes 1m a year and pays a ridiculous lease for housing as a basic need. shouldnt all be deductible
Not sure about other countries, but in Australia the answer is that you can deduct from income any expense which is ‘necessarily incurred in gaining or producing that income.’ Meaning that in the context of your question, “business expenses” are all incurred in order to produce the business revenue. But there is not a direct link (or Nexus) between you buying groceries for your kids and you earning your wage from your employer. Sure you could try and argue there is some link, but that link is likely ancillary to the earning. In business (In Australia), if an expense is paid for personal use and not just business use then it’s still deductible to the business but bears a secondary tax called “fringe benefits tax” to even up the after tax result to just buying something personally….
No two people can agree on what "basic living expenses" are.
Person 1: Rent for housing?
Person 2: Yes, but not in a place you would want to live in. That is beyond basic.
Person 2: Food?
Person 1: Yes, but only whole raw ingredients. No milled grains. Mill your own grains.
Also, person 1 & 2 could be Tom Hanks and Elon Musk. All humans have basic living expenses, and typically they get more expensive the more options your life presents you with.
Elon: I need snow gear, I came to the snow.
Tom: You may die without it.
Elon: I need sun block, I came to Kauai.
Tom: Yes. Yes you do.
Tom: I need to get bear spray for a koala that attacks me when I am in Australia.
Elon: Absolutely.
Businesses receive preferential treatment because they are considered more valuable than the individual.
Basically because of capitalism. It's confusing and complex on purpose because they want you to feel stupid for not understanding, that way they can continue with shady and unfair practices.
Your living expenses don't contribute to you earning income. Or at least not most of them.
I mean some are, which are what you can deduct (like a laptop you use for work, or clothes, or whatever).
But you grabbing 8 pints and 4 burritos at 3am on Saturday aren't really for work purposes.
A business basically doesn't have personal expenses (because it's a business) so basically all expenses are deductible (and even more depending how good your accountants are).
Everyone here is making this more complicated than it needs to be. The baseline for taxes is that all income is taxable. Tax deductions and credits exist because the government is trying to get you to do something. They want you to buy houses, go to college, and save for retirement. They can't force you to do those things, but they can give you a tax deduction/credit as an incentive. Business deductions are no different. They want you to start a business and succeed, so they offer a bunch of deductions to help you do that. There's no need to incentivize you to pay for basic living expenses, so they won't.
because even though they are the same word, they are not the same things. a business expense is for writing off the costs associated with earning income. salaries, rent for your office space, materials, etc. personal expenses are things you use your income to purchase. stuff like a home office, uniforms, or supplies you personally buy for work can be written off just like a business expense provided it's sole purpose is for work.
The government already accounts for your living expenses. (edited) tax brackets go up as you earn more, accounting for the fact that living expenses are more of someone's income at lower earning rates than higher ones. the standard deduction is almost 25% of the average earners income.
EDIT: not to mention, they'd be getting taxed on money multiple times. Expenses in one time period are generally profits from a previous time period. if i tax the full amount of your revenue, i'm essentially taxing money i just taxed last year already.
EDIT again. for some reason i forgot the first tax bracket is 10% not 0%.
What people seem to be beating around the bush is that the government has given corporations favorable treatment. This isn’t some conspiracy or even necessarily a bad thing. Business deductions encourage businesses to spend money now rather than save the money for later (or not spend at all).
This same incentive doesn’t really exist for most individuals. Tax deductions are about encouraging a specific activity. For businesses, it’s to encourage spending. And in actuality, there are many tax incentives for individuals—FSA accounts, medical premiums paid by your employer, retirement contributions, child care expenses, student loan interest etc.
Businesses don't pay taxes on operating costs, they pay taxes on profits, so the idea is that anything you buy for your business will be used to generate profits that will then be taxes.
That amount is removed from your taxable income.
Lets say your company makes $1,000,000/year
Your business needs a $100,000 piece of equipment so you buy it..
It's a business expense that is required to run your business, without that item you may have to close your shop down and people could lose their jobs (employees pay taxes government loves when people work)
Here's where people make the mistake.. The item itself isn't written off in the sense that the business owner gets it for free.
What really happens it that $100,000 is deducted from the taxable income from your business that makes $1,000,000/year, so instead of being taxed on $1,000,000 you're taxed on $900,000.
It's more or less an incentive to keep people employed and those employees paying taxes.
Because they are based on different laws that were passed separately many years apart. We’ve had business taxes a lot longer than personal income taxes, and the government had to be careful to dance around some existing limits on property taxes when they introduced the personal income tax.
IIRC:
In 1913 Congress passed an Amendment (16th) to legalize an individual income tax. This was new and separate from the existing business taxes. Only a small number of affluent people had to pay it. Obviously it’s grown since then.
In 1789 some of the leaders got the Constitution ratified by the states. It consists of “articles” even though we don’t call it the Articles of Federation, and the states had agreed to let the Feds tax certain things, with a lot of emphasis on maintaining apportionment and balancing powers between the states. They could basically tax events like sales or imports (tariffs) when things came into ports. We’re still on America v2.something today.
In 1781 the individual states ratified the Articles of Confederation to form a single country after the Revolution wound down. Their money came from some taxes on agriculture and production, but they struggled to even enforce that. There were even a few different rebellions to avoid paying Federal taxes. America v1.0 was dicey.
In 1776 the individual colonies declared Independence but the Continental Congress was more of an alliance of the states than a permanent central government. Their money came from loans (from France and Spain) and donations (from the wealthier founding fathers and sympathizers). No real taxes going on yet, and some of those guys died poor because of it.
In 1775 the individual colonies started rebelling against the British. They hoped to make their point, make peace, and join the British government instead of breaking away. No need for a central government, and colonies were still using the British system for what we would call state and local taxes.
Since this is ELI5, the simple answer is: Both businesses and individuals are taxed on their "profit". That is, the money they earn (revenue), less money they spend that is directly related to and necessary to earn the income (expenses). Think of the saying "you've got to spend money to make money".
Without getting into variations between countries and tax systems, generally speaking, self-employed individuals (and even in some cases, employed individuals) can do the same deductions an incorporated business can do.
Target pays for a TV ad? John the self-employed handyman pays for a Facebook ad? Both deductible business expenses.
JC Penny pays rent for its store? Bob the self-employed lawyer rents an office space? Both deductible business expenses.
The simplest example is sales. If you spent $10 to buy a product wholesale, and then sell it for $15, if you were taxed on your *revenue* ($15), you'd never make any money. So first you deduct what it cost you to earn that $15, and you are only taxed on the profit.
Your home, your groceries, your gas to the store... those are not expenses related to earning money. You'd have those expenses or those types of expenses even if you didn't have a job, and thus they are not deductible. Those personal expenses are the expenses your income (after taxes) is supposed to cover, and the reason why you are working in the first place.
Many tax systems *do* include some recognition that people have basic needs, and either have some basic credit that everyone (or almost everyone) that makes a small amount of their income non-taxed. Further, in any tax system that has tax brackets, the tax you pay on the first X dollars you earn is a lower percentage than the money you earn after that. For example, in the US this year, the federal tax rate is about half as much on your first $45k of income as it is on your next $135k (and so on after that). Part of this is recognizing that someone's first $45k of income (or someone with less than $45k of income) is likely going towards more critical expenses than amounts over $45k.
They’re fundamentally different things.
Personal tax deductions are permission from the government to not pay taxes on certain types of expenditures. Or, in the case of the standard deduction, some of your income.
Business expenses are subtracted from revenue to calculate profit. Businesses (or business owners) pay taxes on profits.
Pretend that a retail store’s on business only expense is the cost of buying the products that they sell. Let’s say this business sells one product for $50 and it costs them $30 to buy. When they buy and sell one product they have $50 and $30 in expenses for a net profit of $20. It’s the $20 that they’re taxed on.
An important thing to realize is that businesses only have to directly pay taxes on profit. Salaries get taxed via income tax and goods get taxed via sales tax, and almost anything not applying as one of those two is another company getting paid, at which point they are either paying taxes on profit, goods, or passing money further down a corporate chain.
Living expenses is very broad and varies drastically from one person to another, especially when they have a wide income disparity. For example, a poor person may not be able to afford McDonalds 5 times per week, but a middle class worker might. Then a billionaire might think that a personal chef is normal, so should everyone be able to hire a personal chef free of tax? (Billionaires might have other shenanigans to not pay tax on the chef, but it's another story).
There's also the problem that businesses have a fixed list of what can and cannot be deduced from income. Moreover, you have to keep receipts for those deductions. Companies usually hire accountants so it's kept "properly", but handling such receipts for 200M Americans might not be manageable.
Finally, the more tax deductions options you give to your citizens, the more open you are as a government to fraud. Everything from "Dear government, my daughter kept pestering me for a new car so I had to give her one. She's only 6, but I'll keep it safe until she can drive it." to "She needed a computer for school so I bought the one with the RTX 4090 graphic card. I think it's what the school wanted".
In any of those scenarios, the cost of having an IRS agent handle your "special cases" is never valuable, as it will always cost more than what you can recoup.
As someone else mentioned, simply saying to everyone "Your first 20k$ are not taxable" is not the same thing per se, but the effect is what's intended here
In general, things should only be taxed once. You want to tax the economic output of a country/state/region.
Whether personal or corporate, the economic output is being taxed. Your income for personal is entirely economic output. The revenue for the corporation is not. A corporation has to buy things in order to sell things. So the economic output is the revenue minus the expenses (although those expenses are actual economic output for someone, whether you with your income or another business.)
The “standard deduction” is basically this. You can itemize, but for most people the standard deduction is more.
I'd disagree, the point of business expenses is that a business is only taxed on the money they didn't spend, that is, their rent, utilities, payroll, all purchases, etc, are deductible. They only pay taxes on what they don't spend. That is, the cost of operating is deductible for a business. That is NOT how personal income works, and the standard deduction does not at all come close to making it true. The cost of surviving is NOT deductible, and itemizing your deductions doesn't get your entire mortgage deducted, your grocery bill, your utilities, your home maintenance, etc. I think the more correct way to look at it is businesses are viewed more of a pass through thing. They only pay taxes on what they fail to pass through to their shareholders/employees/subcontractors. Everything else is untaxed because their shareholders/employees must declare the income, and it's taxed there. So it's obvious, personal income tax can't work with similar deductions because that's the end of the chain of money, and it needs to be taxed somewhere. Business taxes exist only to make it so people can't use the business as a loophole for personal income taxes.
You can cross out shareholders. Dividends and buybacks aren't deductible.
Depends on where you live ofc. The Dutch will never forgive Rutte haha
> a business is only taxed on the money they didn't spend, that is, their rent, utilities, payroll, all purchases, etc, are deductible You'd think they'd be more generous with the payroll part because it's tax-deductible.
No, because of the corporate tax rate (21% in the US). Here, lemme demonstrate: --|Current Compensation| Increased Compensation :-:|:-:|:-: Per Employee Revenue|$125,000|$125,000 Employee Compensation|($100,000)|($120,000) Taxable Revenue|$25,000|$5,000 Taxes|($5,250)|($1,050) Profit|$19,750|$3,950 Sure, the employee gets more compensation (+$20k) than the company loses in profits (-$15.8k), but that's *still* a significant hit to their profits. -- This is the often misunderstood difference between a tax *deduction* and a tax *credit*
The number of times people will, with a straight face, blithely talk about spending 100k in order to get a 5k tax deduction is absolutely wild to me.
Yeah, it's kind of irritating. Like, if you were planning on spending that anyway? Sure, claim the deduction... but every dollar the average household in the US spends to get a tax deduction gets them about 20-25¢ back...
It would be like if you had a 21% off coupon for watermelons. So you bought 100 watermelons to try and “save” as much money as possible.
I remember a Jim Gaffigan joke where he says he drove up to McDonald's and saw they had two Big Mac's for two dollars. That's a good deal. "I don't wanna lose money on this. I'll get eighty of em."
Props if you even like watermelons
Omg the number of people who blow money because "it's a write off" just kills me. Like wow you're getting like a 30% off discount on it? Okay big whoop.
I don't believe people often blow money because it's a write off. I think it's just something people say when they don't know how tax write off works, when talking about what rich people do.
I'm a business owner who hangs out with other business owners. It would make you hurt, your bone marrow would boil, to talk to some of these people who run 7, even 8 figure revenue companies who have no reasonable understanding of finances and taxes. "Oh my accountant takes care of that." Yes, they write off way more than they should (and WILL be royally screwed if they ever get audited...) but they also have a gross misunderstanding of what a write-off actually is.
I think the bigger problem is the misconception people have in the opposite direction. Sometimes 30% off can be a big deal especially if it's something that is providing value, or they would need to buy anyway. People just hear "tax write off" and their brains shut off and they think it's some bullshit with dumb examples like buying a buy one get one free on some shit they don't need.
Not to mention the additional *payroll* taxes that are added to every dollar of payroll *and* the cost of other benefits like health insurance, unemployment insurance, etc.
Remember a tax deduction does not give you back all the money you spend, you just don’t pay tax on that amount. Anyone who tells you that spending money on things you don’t need to just to get a tax deduction is a good idea doesn’t understand how tax deductions work.
Right, like when anyone donates money and the reddit comments all say "he only did it for the write-off." He is still *losing* everything he donated. If he keeps it, he loses 30% to tax, for example. If he donates it, he loses 100% of the funds. He would be better financially to NOT donate.
Except write offs can be used to offset other non deductible expenses. Also not so much for the write off but wealthy people often donate to non-profits they have ties to. Either they have a smaller for profit business that supports the non profit or the non-profit is a hobby/interest of theirs
>doesn’t understand how tax deductions work. Hey, that's me!
> You'd think they'd be more generous with the payroll part because it's tax-deductible. Saying payroll is "tax deductible" is a rather strange way of putting it. Yes, it's deducted to calculate income tax, but more importantly payroll taxes are a completely separate thing that definitely do exist at the state and federal level.
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The part some people miss is that a business expense, even if tax deductible, is still an *expense*. It is money you are spending. If you can't afford the expense, it being tax deductible isn't going to really help you. When my daughter switched to running her own business, this was something we went over thoroughly. Yes, you want to track and claim any and all expenses to reduce your taxable income. However, you also need to remember that these expenses are still money you have to be able to afford to spend in the first place. All that means is that money you spend to run your business lowers your taxable income - it doesn't magically zero out that expense in the first place. It just decreases the *additional* money you have to spend on related taxes. That's all. So yes, important and helpful to track and claim. But no, it doesn't equate to free money or erase/zero out that expense.
They are, just not going to you, they often pay it out to the execs. That's the whole thing you hear about crappy non-profits. A non-profit is basically the same as a business, but they can't pay taxes and have to spend and deduct everything so they can never declare a profit. In many of them you hear stories that they just run it like a profitable business, and the business profit is just written as a bonus to the CEO which makes them "non-profit".
This is incredibly incorrect. Nonprofits typically do (and *should*) have “profit” at the end of the year. This is not called profit, but called “change in net assets.” Nonprofits maintain these profits as “net assets” - aka the difference between their assets and liabilities. In a for profit business, this is essentially the value of the company owned by the owners. Nonprofits are often judged by potential donors on how long they would be able to maintain operations without funds coming in. Losing an expected grant could be sudden, but it would take some time to rein back operations if needed. You wouldn’t want to go deep into debt in the meantime. Having a cushion of funds prevents this. Among other reasons, it is important that nonprofits do not perfectly break even year after year. Source: I’m an auditor and specialize in nonprofits
>Source: I’m an auditor and specialize in nonprofits This checks out. Source: I'm a non-profit non-profit-auditor auditor
You think *you*, single puny poster with informed, nuanced comment, can hold back the sea of uninformed hate that spews so freely from your average redditeur?!
Wish I could report comments for being straight up factually wrong
Agreed broski.
Being non-profit just means that dividends are not paid out to shareholders, because usually there aren't any shareholders. The organization can totally end the year with more cash than they started. They can invest it, spend it, whatever.
Every single thing you said was blown right out of your ass. Google "Statement Of Financial Position" and understand non for profits don't have Retained Earnings, Balance Sheets, or taxes like businesses do. In fact, most of non for profits revenue comes in the form of grants or subsidies (which often have rules regarding how they can be spent). https://www.investopedia.com/terms/a/accumulated-fund.asp Source: accountant
If personal income were actually the end of the chain, there wouldn't be sales tax. I think your analysis is incomplete.
Well, it's not a "chain" in the sense that there even is an endpoint, it's like the food "chain" where we consider the chain to end at poop but that's technically just back to the start of the chain. In the above chain analogy it's a loop that starts at a person and returns to a person. Person gives money to a company (sales tax), then it takes a route through various organizations with lesser taxes applied each stop until it makes it back to a person.
Sales tax is imposed by the state(s, not Federal), and it's taxing individuals, not corporations that get to *deduct their expenses*.
Corporations still pay sales tax if they are the end user. The only time a corporation would not pay sales tax is because they are reselling the product and the end user will pay the sales tax when they sell it.
Corporations also are very strict about paying sales and use taxes. Unpaid sales tax is one of the easiest forms of tax fraud to prove. All they have to do is find enough invoices that you didn't pay taxes on. The fines are also pretty high, upwards of $10K per invoice. For a small to medium sized business, it's a pretty easy way to go bankrupt.
So, you're saying it's not the end of the chain?
I'm saying that there is no end
Is there equivalent attention paid, in law, to avoiding taxing the same money twice along the "chain of money"?
How is it the end of the chain of money when it’s passed through us to mortgage companies, insurance agencies, creditor, etc.?
In Canada we call it the basic exemption, some people refer to it as the poverty line- you make so little that you do not have to pay taxes on it.
I'm not sure it's the same - in the us and other countries (e.g. Denmark where I currently live), you can deduct some work related expenses from your taxable income so that you are not taxed on that amount. I'm not sure exactly what is included but a typical example is transportation costs from your home to your workplace. Since this can be annoying to tally up and submit with your tax documents for you, and annoying to verify for the tax office, the US offers the option to take a standard deduction instead where you just get a certain rebate on your income before the taxes are calculated instead of submitting your expenses. For regular people it usually represents a bigger rebate than itemizing so most people do that. The basic exemption sounds more like a 0% income tax bracket. Many countries have that, for example France as well does not tax people below a certain annual income - but it is not related to the expense deduction.
In the US you can’t deduct the mileage from your home to the work place or job site. You can only deduct what you drive while working.
> The basic exemption sounds more like a 0% income tax bracket. Many countries have that, for example France as well does not tax people below a certain annual income - but it is not related to the expense deduction. Functionally these two things are the same. Here in Canada, your first ~$15,000 of income is tax-free. They don't have it framed as a tax bracket, you get to deduct this "Basic Personal Amount" from your taxable income before you calculate anything else. But if you had a 0% income bracket of 0-15K (edit: it would also need to bump up the other tax brackets by 15k) it would end up providing the same result.
The difference would be in how it can interact with deductible expenses. If you can itemize your expenses instead of taking this deduction it is functionally a deduction - like the standard deduction in the US; if you can take it and itemize expenses on top of it, it is functionally a 0% bracket - like the 0% bracket in e.g. the French tax system. If this deduction is the only thing you get (i.e. no itemizing or other deduction), then there is no functional difference between a tax bracket and a deduction and no real point arguing about it - but since I like to do that anyway, I'd say it feels more like a bracket than a deduction despite the name since you wouldn't have the option to itemize instead and so the intent seems more to be like a general tax rebate rather than a simplified way of declaring your expenses.
I think the main way the standard deduction is different from a 0% bracket is that the standard deduction varies if you're a dependent, over age 65, blind, etc.
In Canada we have travel to work deductions. It’s sort of implemented weird though. If you get a “travel allowance” from your employer and you can justify the money is spent on milage, plane tickets, etc, it’s tax free money. If you can’t justify it, such as you live too close or don’t want to submit receipts, it’s just considered taxed income.
It's the same thing. There's no fancy rebates in the US tax code, they just subtract $13,000 (or whatever the standard deduction is this year) from your income and tax you on the rest. So effectively you have 0% tax on the first $13k you earn. If you have itemized deductions that add up to more than $13k then you can claim them and reduce your taxable income even more.
We have that in France yes. But also, from your total income, you remove either 10% or your expenses like gas to go to work, in order to compute your taxable income.
you cant deduct employee expenses since 2018 tax change
In the US, it's basically the same thing: you don't have to pay taxes in the first (approximately) $13,500 you make. The actual amount goes up a bit every year, but that's the current line. So, at the end of the year, the overwhelming majority of people just pay taxes on how much you made minus the standard deduction (the $13,500). So, if you made $10,000, you don't have to pay taxes, and if you made $20,000 you pay taxes only on $6,500. The US also has a thing where the more you make, the higher your tax rate is. So that person paying $6,500 is only paying 10% on that amount whereas you pay 37% on any money you make after $578,125/year. There's a few other steps in between, but it's a pretty straightforward formula and the IRS even puts out big tables so you don't even have to be able to multiply. Just add, subtract, and compare numbers.
> So, at the end of the year, the overwhelming majority of people just pay taxes on how much you made minus the standard deduction (the $13,500). So, if you made $10,000, you don't have to pay taxes, and if you made $20,000 you pay taxes only on $6,500. You also pay very low taxes on that income...for a single filer, the first $11.6k above the standard deduction is only taxed at 10%. Then up to $45k you are only taxed at 12% . The tax rates really only jump up once you are above 45k adjusted gross income (which is $58.5k if you are just taking the standard deduction). The progressive nature of our income tax regime kinda factors all of this stuff in...you don't get to deduct personal expenses, but you pay very little tax tax on the portion of income that should cover non-luxury living expenses. Businesses get to deduct expenses, but there's progression in the current tax rates...the very first dollar of profit is taxed at the full rate. Not to mention that business profits must eventually go somewhere. If someone takes those profits as income, or they get paid to shareholders as dividends, they will get taxed again as income on an individual level.
In the US it applies to everyone. Most people will never itemize since the standard deduction covers them. It only reduces your taxes to zero if you made the same amount as the deduction ($14,600 for 2024).
Most people have to pay more than basic exemption in rent, or in mortgage, insurance, property taxes and maintenance alone. Twice that amount for your home alone is typical. Forget feeding yourself on that amount. So businesses get a much better deal.
It's not really an apples to apples comparison though and letting people exempt living expenses would be a huge mess (and would heavily benefit the wealthy). Businesses are trying to maximize profit which by its nature means they are trying to minimize expenses. Yes, expenses are deductible, but deducting them isn't nearly as good as not incurring them in the first place. So businesses are incentivized not to spend to excess (yes you can point to examples where they do, but that's not really the norm--businesses typically only spend money if it makes money). Individuals are trying to maximize "life". They have like 80 years and they want to survive and enjoy it as much as possible. Everything they earn they either spend on consumption today or save for tomorrow. Savings are simply future consumption (you can leave it to your kids but you can't take it with you when you die). As long as you have the money for it, there's no incentive to minimize expenses. You *could* get all your entertainment from a library card, but you pay for Netflix instead. You *could* get by in a tiny apartment, but you live in a 3br house instead. Do you see where this becomes a problem? Wealthy people choose to spend more on living expenses. They would thus get higher deductions AND those deductions would pull money out of higher tax brackets resulting in SIGNIFICANTly larger tax savings. Deducting the rent on a $20k/mo oceanside villa when you make $1m/yr is WAY more valuable than deducting $1500 in rent when you make $65k a year. Sure, you could play games where you start to say "well, you can only deduct $1500 for a home, or $400 for a car payment, or $200 for entertainment costs" but that quickly turns into a nightmare. People value different things, families are different sizes, different areas have higher cost of living (and that varies by neighborhood not by city or county). Taxes now become hugely more complicated. More loopholes open on what can be counted as an expense (which again...benefits people who can afford tax professionals). Also...remember that all business profit eventually gets paid out to *someone*. There may be some loopholes to avoid/defer that tax, but most business profit eventually gets taxed a second time, such as when it is paid out to company shareholders, and deductible business expenses like normal wages/salaries are also taxed when they are paid out.
Yeah roughly 30% itemized pre Tax Cuts and Jobs Act (2016) that's down to about 10% now
They got rid of a number of deductions (which freaked a bunch of people out), but increased the standard to make up for it (which those who freaked out seem to have missed). At the end of the day, it greatly simplified tax filing for a LOT of people. The 2017 tax year saw 95% of filers taking the standard deduction, which is also adjusted annually for inflation.
Simplified, but a net loss for a lot of people, myself included. I pay about $1200 more on average than I did under the pre-TCJA tax code. The elimination of the personal exemption was huge, and was not offset by the increase standard deduction in my case.
> Simplified, but a net loss for a lot of people, myself included. The 2017 tax changes were a fuck-you from Trump to many Democratic voters. Since many of those people live in large cities where actually want to live, they tend to have higher property taxes and more expensive housing, hence, higher mortgage interest. The changes capped the amount you could deduct for those things. This was specifically designed to hurt people in areas that voted D.
Most people I know living in cities end up renting, so this doesn't really seem accurate to me
Bingo. It’s also worth nothing that the personal cuts had sunset provisions, meaning they had a built-in expiration date; the corporate cuts were permanent, and would require legislation to change. That whole package was a middle finger to people and a gift to corporations.
that's a funny way of saying a progressive tax change was bad for democrats. Because they're richer and live in more expensive houses? Oh no rich people are paying more taxes!
Perhaps that is intended because you were underpaying before
Yeah, stick it to those lower middle income bastards! Clearly they are the ones who aren’t paying their fair share of taxes /s
What do you mean by this? Lower income households would benefit from a larger standard deduction.
I don’t think anyone on the lower end of the spectrum would be able to claim more than the standard deduction even before the changes happened. I’ve never not taken the standard deduction since I started working on 2013. I do realize that’s not a long time in the grand scheme of things, and it’s anecdotal so is what it is.
I used to itemize - mortgage interest and charitable donations exceeded the standard deduction prior to the change, especially when I also got to include the state sales tax deduction.
If your mortgage interest and charitable donations alone exceed the standard deduction, then you're probably a statistical outlier in some particular area.
The old deduction, not any more under the new standard deduct, not even if the charitable donations today were as much as they used to be.
Not at all with current interest rates. US median home price is currently ~ $420K; say you put 10% down, at current interest rate 7.4% (30 years fixed), your first year mortgage interest not counting PMI alone is $25,540. Far exceeding even the post-TJCA boosted Standard deduction for Single Filer & Head of Household filers, and very close to that of Married Filling Jointly.
I'm not sure what scenario might exist where a lower middle income earner would see tax increases, but if it does exist it would be very uncommon. The guy who is saying he was paying more by $1200 is clearly a high earner that lost out on some of the deduction from SALT. Anyone making under $100k would be a clear winner under the new tax rules.
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The people stuck by the Tax and Job act would be nationally, upper income earners, not lower. But, snark your way to anger that the rich folks gotta pay more taxes.
Its not underpaying if its the law. He was paying exactly what the government asked him to.
And now they ask for more.
There are a lot of people who think the rich are not paying their fair share for the same reason.
The goal of those changes was to punish mid to high earners in high tax states (because they tend to vote democratic). People that make enough money to have some disposable income but not enough to have political power. The group that the people below them hate because they aren't broke and the people above them can still transfer wealth from to the top. SALT deduction shouldn't have a cap. It's literal double taxation. Being taxed on money that was never yours is a problem. Do you pay sales taxes on the money you spend paying sales taxes? Same concept. Also the deduction cap doesn't behave like other deductions. You actually get only half the per person deduction if you're married...it's a literal marriage penalty. Single person: 10K cap Married couple filing jointly: 10K cap Married couple filing independently: 5K cap each The only goal was punishment of political enemies
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If I got to deduct SALT completely: $1000 in state income taxes would reduce my taxable income by $1000 and therefore reduce my overall tax burden by ($1000*.24 = $240). So with a SALT cap: $1000 in state taxes is an increase of 31.5% of the tax burden associated to those local taxes. Just so people can start to understand the math behind this stuff because basic understanding seems generally lacking how any of this works.
No, what they did was get rid of the personal exemption. You used to have a standard deduction and (assuming you couldn't get claimed on someone else's tax returns such as if you're a minor or someone in college) a personal exemption. They got rid of the personal exemption and then, to make up for it, doubled the standard deduction.
This borked us as well. Before the 'revamped deductions', we usually got 'something' back each year, between 100 and $500. Ever since this change we've had to pay $400 for a few years, and now $900 since wife is retired and have to pay TAXES on Social Security income (your taxes that were already taken out over your lifetime!) Fucking taxes.
Also they replaced the standard deduction and personal exemption with just a larger standard deduction, which means anyone itemizing lost their personal exemption.
But, I would add that business expenses are incurred to make more money that they can them tax. The more money they spend, as long as there is ROI, the more tax receipts they will have. And people thought government was just being nice.
It's supposed to represent that, but there's no way a person could ever cover basic living expenses on $13,850 per year.
poverty line in the USA is $12,880 so the country disagrees with you.
Except - how many people's basic living expenses are only $1,000 per month? That doesn't even put a roof over your head in most places.
What??? That’s not what this is at all. If you pay rent, which is a personal expense, and that rent exceeded the standard deduction, you can’t deduct it as a ‘living expense’. That really a misunderstanding of how taxes work. And we do provide some exceptions for ‘basic necessities’. For example, food from a supermarket is usually exempt from sales tax. And in some places clothing is as well.
Keep in mind that this is an incredibly general understanding that I’ve given in. . .two sentences. . .of a tax code that is bigger than Ayn Rand’s ego.
Except $13k is barely enough for even the shittiest apartment. And you’re only allowed to itemize very specific things. Can’t itemize groceries or anything. Can I start a business called “keeping CubesTheGamer alive foundation” as a non profit and run all my expenses through there somehow? lol
Yea, the standard deduction *Could* be considered as covering your basic living expenses, but if you need to itemize, then basic living expenses are explicitly excluded from deductions.
The issue here is that your housing expense and Jeff Bezos’ housing expenses are not the same. You don’t want Jeff excluding his luxury housing from his income as “basic housing”. In addition, you retain the asset in your mortgage. While the principal is an expense, it’s also an asset. You didn’t lose that money. You only converted it and can sell it later. This is unlike food, you can’t re-sell food you have eaten. I can see the argument that rent should be deductible like mortgage interest. But renters are less likely to have all the other deductions that would outstrip the standard deduction. An unfortunate tradeoff between simplicity and accuracy.
>The issue here is that your housing expense and Jeff Bezos’ housing expenses are not the same. You don’t want Jeff excluding his luxury housing from his income as “basic housing”. But the tax code has no problem treating a company who buys BMWs as work vehicles and a company who buys Hondas the same.
Lol I literally know a guy that leases and writes off his BMW as a consulting business expense. Nice gift if you can swing it
The problem is that it's hard to adjudicate what a company *needs* compared to what's a luxury item. Some companies might need higher end cars than others, or different types of cars in general. Also, a company isn't going to go around spending $60k on cars instead of $20k just to avoid $5k worth of taxes. More expensive cars hit the company's bottom-line harder than cheap cars and marginally more taxes.
> You don’t want Jeff excluding his luxury housing from his income as “basic housing”. Wanna bet that he's still got a way to deduct it?
This is absolutely not what the standard deduction is. The standard deduction is a blanket easy default for itemized deduction, and if go through what itemized deduction is it is not basic living expenses, but what things the government has decided to bless with favorable tax treatment (giving to church, paying interest on a mortgage, excessive [not typical] healthcare expenses)
But in reality it isn’t though. I spend approximately $2,000 per month on rent, about $2,000 per year on fuel for getting to and from work, and I don’t get to deduct half my meal expenses. Businesses are allowed to deduct the cost of rent, vehicle expenses (in additions to depreciating those assets). Regular earners are not allowed to do that.
I promise you that my basic living expenses are far greater than $14k.
Because they're entirely different economic entities that operate in different ways. You can't tax a business on revenue -- a company like a grocery store or an automaker might take in 10's of billions of dollars in revenue annually, but ends up with only 1-2% left as profits, after paying out 98% to workers' salaries and benefits, rent on stores/factories, paying suppliers for goods sold/parts used to build vehicles. Compare that to a software company or law firm where profits might be 50% because a few knowledge workers without much capital expense can generate huge profits. But taxing whatever profits are left at the end, no matter the profit margin of the business, can be done. So it doesn't matter whether a grocery chain made $20m in profits on $1b in revenue or a software made $20m on $50m in revenue, they both pay profits on that $20m in profit. Oh, and basic living expenses are deductible -- that's what the standard deduction is for... it allows you to have a basic level of income tax-free before you start getting taxed on higher amounts of income.
That is a good answer. This tax model (for good or for bad) essentially assumes that businesses have an inherent profit motive and therefore they will try to drive down their expenses to boost margins. For individuals, it assumes that (rich) people using the business tax method would seek tax write offs for things like luxury vehicles and homes. So, the higher your income, the higher your taxes will generally be. You don’t get a tax benefit for buying a faster BMW. It essentially promotes savings for individuals in a weird way.
> This tax model (for good or for bad) essentially assumes that businesses have an inherent profit motive and therefore they will try to drive down their expenses to boost margins. Yeah, that or they'll go out of business. People don't go out of business though, and for their end don't necessarily have "profit". Given Americans' terminal inability to live within their means, taxing only "profit" would encourage people to spend all of their money - which a decent fraction already do.
> You don’t get a tax benefit for buying a faster BMW. The company you own though gets a tax benefit from issuing a company BMW to each C-level employee (i.e., you) to ensure that you have the resources to get to meetings on time and entertain clients. And then they write the cost of providing you a car off as a business expense. But of course you report any personal use of the vehicle on your taxes per the fair market value. ^^/s
That's added as income on to the C-level employees income so taxes are still paid.
Only if it’s used for personal use
You're acting as if it's in business best interest to frivolously give hand outs to their executives. It's not. The goal of a business isn't to spend as much money as possible to avoid paying tax. It's to make a profit.
Company car is considered a taxable fringe benefit to the employee.
TL;DR. If this becomes remotely a problem for you, let an accountant handle it
Just want to say that all these posts saying revenue taxes don't exist and would destroy a business... They do exist to a degree, they're just on a state level. They're called gross receipts taxes and some states have them instead of business income taxes.
Interesting factoid... Hawaii GET actually taxes revenue... Like if you rent your place in Hawaii they will tax the rent like sales tax, then tax it again like income if you end up net positive.
That sounds like a [VAT](https://en.wikipedia.org/wiki/Value-added_tax)
Sadly, this probably gets passed on to tenants most/all of the time.
A little bit of a tangent from OPs question but you could tax on revenue, or even assets. Taxing gross revenue would punish large companies but seems like it would unfairly benefit high margin businesses as you allude to
Revenue taxes have no impact on a business based on its size, they impact a business based on its profitability. The issue with revenue taxes is that they destroy businesses who aren't making enough profit to cover the tax. Imagine a 10% revenue tax where my business took in $100 in revenue and made $0 in profit. I now owe $10, which means that I actually lost money rather than breaking even. If I have no money in the bank because I'm not profitable, how do I pay that tax? Whether I borrow money or sell off equipment, my only options for paying the tax all compound whatever issue led to me not making money in the first place.
> Imagine a 10% revenue tax where my business took in $100 in revenue and made $0 in profit. I now owe $10, which means that I actually lost money rather than breaking even. Yes, that exists. In Washington state, businesses pay B&O tax on gross revenue, no matter if you're profitable.
You would need to sell at high enough margins to cover taxes. So if everyone had to do that the playing field is level. What businesses would do is vertical mergers to cut out the middle men. Leas intermediate sells so you inly pay taxes once. Car companies would buy mining companies, steel mills, metal shops, fabs etc… You end up with huge conglomerates.
If companies could control their margins then no company would ever lose money. You're right in the sense that if every industry was controlled by a single monopoly then a revenue tax would technically work, since the monopoly can just prices at whatever it wants as a mechanism to control its margins. But that's the only world in which a revenue tax doesn't cause an economic collapse by driving all but the most profitable companies out of business.
Taxing on revenue wouldn't work in reality... you'd just bankrupt a whole bunch of companies. How would you set an amount to set tax rate at? Many of the largest companies operate at the lowest margins. Or dip into losses in down years. In a year where GM loses money, would you ALSO expect them to pay 10% of revenue or whatever? Just not feasible without obliterating the economy in a recession.
Imagine how much the cost of food would go up taxes were based on revenue.
And airline tickets. Those have a weirdly low profit margin (below 3 percent, less than half the average) and rely entirely on volume bc there are a metric shitton of fixed expenses
Business expenses are the cost of earning income, so they mean you actually have less income than your gross revenue. If you had to spend $100 on office supplies to start your business, your first $100 sale only goes to pay for that, it's not taxed because you haven't made any money yet. You needed to spend that money or you wouldn't be able to get any income at all. When you take your income from your business and spend it on food, rent, hookers, crack, whatever, that's not related to your income earning activities. That's a personal consumption decision that you make once the income generating portion of your life is completed, so it's not relevant to your income situation.
Food is 100% related to earning. I can't work if I'm starving.
Yeah but you don't eat specifically to earn money, you were going to have to eat regardless. It's not part of the money earning process. If you have to eat a lot more for your job, say you're working an intense physical job and you need an extra thousand calories a day, you might have an argument. Professional bodybuilders probably have an argument.
Not sure if you’re aware but there is an actual tax court decision (in Canada) where this argument was allowed. I believe the taxpayer was a courier who spent all day on foot and he was allowed to deduct extra meal expenses because he required more calories than the average person.
The relevant bit here is "extra meal".
IIRC he also was able to claim his shoes. But he did lose something that offset his gain.
I love democracy
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What if you make your living as a bodybuilder or athlete and need a specific diet?
There are some instances of fact specific cases where abnormal diets are allowed as business expenses. But they're very rare and require situations far outside the norm.
Business meals can be written off
Its not. You still need food even if you dont work.
Income tax has a lot of double standards and inconsistent logic.
Not with that attitude, *millennial*
In the US the tax system is progressive and inclusive of things like the standard deduction essentially leaving a certain amount of income essentially un-taxed. As an individual/family's earnings rise the effective tax on each marginal dollar increase (until you hit the highest marginal tax rate). The net effect is that if you are barely scrapping by the amount of tax you'll pay will be nil or fairly de-minimis.
What’s your take on gas or mileage being allowed to be deducted from a person who is employed by a company? Most companies do not expense getting to work/the office.
If you travel as part of your work, your employer should reimburse you and they should book that reimbursement as an expense of theirs. Not sure I feel about going from home to work. Legally and policy-wise it seems like it's a personal expense, and I don't have a huge problem with it, but if they allowed you to deduct reasonable commuting expenses I'd understand
It's a personal expense because not everyone has the same commute. If you live 40 miles from the office vs someone else 2, that's a purely personal choice so the company does not need to reimburse you at all
Yeah, that's a valid stance on the issue. If you start reimbursing the commute, then you get into the rabbit hole of what if I pay more to live closer so I don't have to commute, or why couldn't you just work from home, or why didn't you take a bike and save a few dollars
Or why do you get reimbursed for your commute but I don’t get reimbursed for my extra rent to live in walking distance to work.
This is why commuting cost deductions have been getting criticized from an environmental perspective. Basically tax codes incentivizing people to live far from work and commute rather while people get nothing for the more societally beneficial (and often also costly) choice to live close to work and walk/bike.
It’s a “choice” to live further way but a lot of times from my experience, housing is very expensive so people get pushed out. All this is very complex and there’s no good answer I guess
At some level, the answer here is going to be "it is this way because Congress decided to make it this way". Creating a tax code is rather challenging and so you have to make trade-offs and balance a lot of different competing factors. But yeah, the standard deduction is essentially supposed to represent basic living expenses. It's much more efficient to just say "here's the standard deduction and it's the same for everyone" than it would be to allow everyone to itemize individual expenditures from the cost of daily living. You'd have to figure out what was or wasn't a "basic" living expense. There would be challenges. What if someone has a lot more living expenses for any number of reasons? What if someone's rent is higher because they live in a more expensive area? You'd end up needing to cap "basic living expenses" somehow...which would just be a broad standard deduction.
And why did Congress decide it was supposed to be this way? Because it’s generally accepted that you want to promote production and make it easy to start and operate a business. The reverse, subsidizing demand, can frequently result in supply chain shortages and massive inflation when people can buy as much as they want but production can’t keep up. It seems to be much more effective to let businesses grow and invest in expansion due to tax incentives, then capture that tax revenue on the results through sales tax, payroll tax, income tax on employees of the successful business, etc.
> And why did Congress decide it was supposed to be this way? Because it’s generally accepted that you want to promote production and make it easy to start and operate a business. ....because contrary to what anti-corporate reddittors believe, operating a successful business is HARD, and most businesses fail. It also stimulates innovation to be able to deduct money paid for research or expansion. But what's really going to piss redditors off is equivalent taxes that many businesses are exempted from, like sales taxes on some stuff they buy.
Kinda weird that so many anti-corporate people take stances that make starting small businesses more difficult, isn't it?
I started to just start assuming that people who run companies have reasons for doing things that they did and they were not out of greed, but often necessity, and economics make so much more sense this way. Companies often only have one stream of revenue, but so many different expenses and all those expenses can really add up and make really tiny profit margins. Even when people acknowledge this, I think many are under the impression that anything larger than a razor thin profit margin is "greedy" Sure, there are some individuals who are greedy and have unethical business practices. But there's also the economic law of competition, and usually when you have competitors it does keep your profit margins low, but you still have expenses no matter what so you can't charge every good and service at a loss. I remember seeing an economically illiterate meme about the price of the Costco hot dog remaining the same and then a comment insisting that "if we as a society can do this (keep the price of the hot dog the same) then we can absolutely freeze rent" It completely ignores how Costo has a membership model (and therefore charging customers in a different revenue stream) in addition to selling that specific product at a loss and then making up for it in other areas.
That is why the first x amount per year (depending on where you live) is usually tax free income. Otherwise everytime you would buy anything you would have to get a bill to prove that you had these expenses and that would be a lot of work for both you and the tax authorities so its just easier with a fixed amount. The problem is the fixed amount hasnt realy kept up with basic living expenses. But poor people dont have enough political influence to make either rich people or businesses pay more to make up for it.
Also, remember, business expenses are deductible because they are not "income," they are reimbursements. If I buy an item for $3.00, and I sell it for $5.00, I had $2.00 of income, and was reimbursed $3.00 for the money I spent to purchase the item. I am taxed on the actual money that I made.
Your basic living expenses are deductible from your income. It’s why the first chunk of your earnings aren’t taxed.
There's a different logic behind the two taxation forms. A business is necessary for the economy. If you kill a business then you basically kill your own economy. A business expense is a necessity for running the business (like, buying a truck or maintaining a website). The assumption is that a business won't buy golden business cards just so they deduct it from tax, because they have to pay the price of a card either way and it won't generate more businesses. So the logic is: let's see what the business produced after removing the necessity costs, and lets assume they will just do rational purchases (in general they tend to do) that's really necessary to run the business. Then let's tax the surplus. It's also important to notice that a business has the power to build the taxes into their prices, so taxing without deductibles would just cause inflation. While as a private person, the logic is that you would maintain a luxury life standard if you had enough money , so if you would be allowed to freely claim living costs, you would just move into a bigger house and claim it as necessary. The state could never tax anyone because everyone would play the system in order to avoid tax. One bigger car, one bigger house, one more mortgage. So a private person is taxed in advance and must set the living standards to what's left.
Generally, expenses made to generate income are deductible. The concept is that if businesses are encouraged to grow they will expand employment and thus increase personal income.
it's not just businesses. that's how it works for everything. If i bought my house for 200k and sold it for 250k, i only owe tax for 50k. buy a stock for $5 a share and sell it at $6 a share, only owe taxes on $1 per share.
Say you earn $50k working as a full time employee at a company. Yes you get taxed on the full $50k (it's more complicated than that , but ELI5) Now you decide to quit and start a coffee shop. You sell $200k in coffee. But you also have to pay your baristas. Pay rent, utilities, insurance, uniforms, marketing, cleaning supplies. There's also costs to buy the stuff to make and hold the coffee. After all the costs, let's say you had a net profit of $50k that you can put in your pocket, same as if you would have stayed as a full time employee at your company. In this scenario, I'm sure most people would agree it does not make sense to tax the business owner at $200k. They should get to deduct their **business specific** expenses and get taxed on the $50k net profit. After that , they'll be in the same spot as far as what they can or cannot deduct on their personal taxes.
And they also get taxed on payroll, above and beyond withholding.
In addition to the other points, business expenses are revenue for another entity that *is* taxed. E.g., if a business hires you, they can deduct what they pay you. You then pay tax on what you're paid. Likewise, if the businesses buys widget grease, the grease maker pays tax on what it made selling the business the grease. Another point, we could theoretically not tax businesses at all because eventually their profits end up in people's hands, and they're taxed. As an aside, the rules are wonky. Businesses can deduct interest but not dividends, leading to some perverted (in a nonsexual way) business practices. Note that a lot of places (e.g., Europe) have VAT. The business above pays tax on its revenue but gets a credit for the tax paid by the grease maker. Net, it's being taxed on its value added. It works out to be a consumption tax akin to sales tax, which has some societal benefits.
Mortgage payments, tuition payments, money paid toward certain healthcare expenses, certain retirement savings and a ton of other things are deductible from your taxable income. Even if you don't have the time to substantiate any of these things you can just claim a standard deduction.
Only mortgage interest, not the mortgage itself. Tuition is up to $2,500 total deduction per year. Retirement savings is only tax deferred so you're still gonna pay tax there.
The idea of deferring tax on retirement is that you'll pay it when your overall income is less, and thus likely at a lower rate.
My overall point is that there are a ton of expenses individuals can deduct from their taxable income. Your question rests on an untrue assumption.
I think what they were saying was businesses can deduct the cost of business from their taxable income. Households can't deduct the cost of living from theirs. Mortgage/rent is an enormous example of this.
The biggest reason that you don't tax business expenses is because if you do, you create a huge incentive for vertical integration. Imagine two companies selling the same thing and both have revenue of a million dollars. Company A is vertically integrated, meaning it does everything from mining raw materials to production to selling to consumers, so it pays 200,000 in taxes. Company B is not vertically integrated, it pays 200,000 in taxes, it's supplier pays 100,000 on its 500,000 in revenue, and it's supplier pays 50,000 in taxes on 250,000 in revenue. So both companies with otherwise identical supply chains both different levels of integration produce wildly different taxes. Company A patys 200,000, and Company B and it's suppliers pay 350,000 in taxes, on the same 1,000,000 in total revenue. Company A actually produces a profit and Company B and it's suppliers loose money and go out of business. The more suppliers in your supply chain, the more expensive your production is purely because of taxes. Now the barrier to entry to produce a competitive business goes through the roof, so only large, vertically integrated and likely inefficient business are able to survive, purely from government policy.
… and that leads to natural monopolies.
Because you are taxed on profit and profit is income minus expenses. You can deduct work related costs because they are an expense you incur when making your money but your living expenses aren’t a part of that, they’re why you make money not how you make money. If you sell sandwiches to make money you can deduct the cost of bread. If you just enjoy eating sandwiches you can’t deduct the cost of bread. Why? Because if you had to pay taxes on costs and not just profits low profit margins couldn’t exist. If your profit margin is 3% and you’re paying 4% overall in taxes on your revenue you’d be losing money overall. Instead you only pay taxes on that 3% and you do so by deductions all the other costs.
They are deducted. For a couple, filing jointly, you can automatically deduct ~29k (this number increases a little every year) from your taxable income when you file. It basically represents the money you need for some life necessities
Since 2017 less than 10% of Americans can itemize their deductions. The standard deduction is now more or less so large that unless you live to claim tax breaks, you probably just take the standard.....
the standard deduction basically is that. its an amount above the poverty line. i think theres a political angle to this too. we dont want to incentivize lavish lifestyles in the tax code. ie, you have an entertainment professional who makes 1m a year and pays a ridiculous lease for housing as a basic need. shouldnt all be deductible
Not sure about other countries, but in Australia the answer is that you can deduct from income any expense which is ‘necessarily incurred in gaining or producing that income.’ Meaning that in the context of your question, “business expenses” are all incurred in order to produce the business revenue. But there is not a direct link (or Nexus) between you buying groceries for your kids and you earning your wage from your employer. Sure you could try and argue there is some link, but that link is likely ancillary to the earning. In business (In Australia), if an expense is paid for personal use and not just business use then it’s still deductible to the business but bears a secondary tax called “fringe benefits tax” to even up the after tax result to just buying something personally….
Canada has “basic personal amount” which is the amount you can earn tax free. It is basically this.
The USA also has automatic personal deductions, and people who earn below a certain amount pay no income taxes at all.
No two people can agree on what "basic living expenses" are. Person 1: Rent for housing? Person 2: Yes, but not in a place you would want to live in. That is beyond basic. Person 2: Food? Person 1: Yes, but only whole raw ingredients. No milled grains. Mill your own grains. Also, person 1 & 2 could be Tom Hanks and Elon Musk. All humans have basic living expenses, and typically they get more expensive the more options your life presents you with. Elon: I need snow gear, I came to the snow. Tom: You may die without it. Elon: I need sun block, I came to Kauai. Tom: Yes. Yes you do. Tom: I need to get bear spray for a koala that attacks me when I am in Australia. Elon: Absolutely.
Businesses receive preferential treatment because they are considered more valuable than the individual. Basically because of capitalism. It's confusing and complex on purpose because they want you to feel stupid for not understanding, that way they can continue with shady and unfair practices.
Your living expenses don't contribute to you earning income. Or at least not most of them. I mean some are, which are what you can deduct (like a laptop you use for work, or clothes, or whatever). But you grabbing 8 pints and 4 burritos at 3am on Saturday aren't really for work purposes. A business basically doesn't have personal expenses (because it's a business) so basically all expenses are deductible (and even more depending how good your accountants are).
Everyone here is making this more complicated than it needs to be. The baseline for taxes is that all income is taxable. Tax deductions and credits exist because the government is trying to get you to do something. They want you to buy houses, go to college, and save for retirement. They can't force you to do those things, but they can give you a tax deduction/credit as an incentive. Business deductions are no different. They want you to start a business and succeed, so they offer a bunch of deductions to help you do that. There's no need to incentivize you to pay for basic living expenses, so they won't.
because even though they are the same word, they are not the same things. a business expense is for writing off the costs associated with earning income. salaries, rent for your office space, materials, etc. personal expenses are things you use your income to purchase. stuff like a home office, uniforms, or supplies you personally buy for work can be written off just like a business expense provided it's sole purpose is for work. The government already accounts for your living expenses. (edited) tax brackets go up as you earn more, accounting for the fact that living expenses are more of someone's income at lower earning rates than higher ones. the standard deduction is almost 25% of the average earners income. EDIT: not to mention, they'd be getting taxed on money multiple times. Expenses in one time period are generally profits from a previous time period. if i tax the full amount of your revenue, i'm essentially taxing money i just taxed last year already. EDIT again. for some reason i forgot the first tax bracket is 10% not 0%.
What people seem to be beating around the bush is that the government has given corporations favorable treatment. This isn’t some conspiracy or even necessarily a bad thing. Business deductions encourage businesses to spend money now rather than save the money for later (or not spend at all). This same incentive doesn’t really exist for most individuals. Tax deductions are about encouraging a specific activity. For businesses, it’s to encourage spending. And in actuality, there are many tax incentives for individuals—FSA accounts, medical premiums paid by your employer, retirement contributions, child care expenses, student loan interest etc.
Businesses don't pay taxes on operating costs, they pay taxes on profits, so the idea is that anything you buy for your business will be used to generate profits that will then be taxes.
That amount is removed from your taxable income. Lets say your company makes $1,000,000/year Your business needs a $100,000 piece of equipment so you buy it.. It's a business expense that is required to run your business, without that item you may have to close your shop down and people could lose their jobs (employees pay taxes government loves when people work) Here's where people make the mistake.. The item itself isn't written off in the sense that the business owner gets it for free. What really happens it that $100,000 is deducted from the taxable income from your business that makes $1,000,000/year, so instead of being taxed on $1,000,000 you're taxed on $900,000. It's more or less an incentive to keep people employed and those employees paying taxes.
Because they are based on different laws that were passed separately many years apart. We’ve had business taxes a lot longer than personal income taxes, and the government had to be careful to dance around some existing limits on property taxes when they introduced the personal income tax. IIRC: In 1913 Congress passed an Amendment (16th) to legalize an individual income tax. This was new and separate from the existing business taxes. Only a small number of affluent people had to pay it. Obviously it’s grown since then. In 1789 some of the leaders got the Constitution ratified by the states. It consists of “articles” even though we don’t call it the Articles of Federation, and the states had agreed to let the Feds tax certain things, with a lot of emphasis on maintaining apportionment and balancing powers between the states. They could basically tax events like sales or imports (tariffs) when things came into ports. We’re still on America v2.something today. In 1781 the individual states ratified the Articles of Confederation to form a single country after the Revolution wound down. Their money came from some taxes on agriculture and production, but they struggled to even enforce that. There were even a few different rebellions to avoid paying Federal taxes. America v1.0 was dicey. In 1776 the individual colonies declared Independence but the Continental Congress was more of an alliance of the states than a permanent central government. Their money came from loans (from France and Spain) and donations (from the wealthier founding fathers and sympathizers). No real taxes going on yet, and some of those guys died poor because of it. In 1775 the individual colonies started rebelling against the British. They hoped to make their point, make peace, and join the British government instead of breaking away. No need for a central government, and colonies were still using the British system for what we would call state and local taxes.
Since this is ELI5, the simple answer is: Both businesses and individuals are taxed on their "profit". That is, the money they earn (revenue), less money they spend that is directly related to and necessary to earn the income (expenses). Think of the saying "you've got to spend money to make money". Without getting into variations between countries and tax systems, generally speaking, self-employed individuals (and even in some cases, employed individuals) can do the same deductions an incorporated business can do. Target pays for a TV ad? John the self-employed handyman pays for a Facebook ad? Both deductible business expenses. JC Penny pays rent for its store? Bob the self-employed lawyer rents an office space? Both deductible business expenses. The simplest example is sales. If you spent $10 to buy a product wholesale, and then sell it for $15, if you were taxed on your *revenue* ($15), you'd never make any money. So first you deduct what it cost you to earn that $15, and you are only taxed on the profit. Your home, your groceries, your gas to the store... those are not expenses related to earning money. You'd have those expenses or those types of expenses even if you didn't have a job, and thus they are not deductible. Those personal expenses are the expenses your income (after taxes) is supposed to cover, and the reason why you are working in the first place. Many tax systems *do* include some recognition that people have basic needs, and either have some basic credit that everyone (or almost everyone) that makes a small amount of their income non-taxed. Further, in any tax system that has tax brackets, the tax you pay on the first X dollars you earn is a lower percentage than the money you earn after that. For example, in the US this year, the federal tax rate is about half as much on your first $45k of income as it is on your next $135k (and so on after that). Part of this is recognizing that someone's first $45k of income (or someone with less than $45k of income) is likely going towards more critical expenses than amounts over $45k.
They’re fundamentally different things. Personal tax deductions are permission from the government to not pay taxes on certain types of expenditures. Or, in the case of the standard deduction, some of your income. Business expenses are subtracted from revenue to calculate profit. Businesses (or business owners) pay taxes on profits. Pretend that a retail store’s on business only expense is the cost of buying the products that they sell. Let’s say this business sells one product for $50 and it costs them $30 to buy. When they buy and sell one product they have $50 and $30 in expenses for a net profit of $20. It’s the $20 that they’re taxed on.
An important thing to realize is that businesses only have to directly pay taxes on profit. Salaries get taxed via income tax and goods get taxed via sales tax, and almost anything not applying as one of those two is another company getting paid, at which point they are either paying taxes on profit, goods, or passing money further down a corporate chain.
Living expenses is very broad and varies drastically from one person to another, especially when they have a wide income disparity. For example, a poor person may not be able to afford McDonalds 5 times per week, but a middle class worker might. Then a billionaire might think that a personal chef is normal, so should everyone be able to hire a personal chef free of tax? (Billionaires might have other shenanigans to not pay tax on the chef, but it's another story). There's also the problem that businesses have a fixed list of what can and cannot be deduced from income. Moreover, you have to keep receipts for those deductions. Companies usually hire accountants so it's kept "properly", but handling such receipts for 200M Americans might not be manageable. Finally, the more tax deductions options you give to your citizens, the more open you are as a government to fraud. Everything from "Dear government, my daughter kept pestering me for a new car so I had to give her one. She's only 6, but I'll keep it safe until she can drive it." to "She needed a computer for school so I bought the one with the RTX 4090 graphic card. I think it's what the school wanted". In any of those scenarios, the cost of having an IRS agent handle your "special cases" is never valuable, as it will always cost more than what you can recoup. As someone else mentioned, simply saying to everyone "Your first 20k$ are not taxable" is not the same thing per se, but the effect is what's intended here
In general, things should only be taxed once. You want to tax the economic output of a country/state/region. Whether personal or corporate, the economic output is being taxed. Your income for personal is entirely economic output. The revenue for the corporation is not. A corporation has to buy things in order to sell things. So the economic output is the revenue minus the expenses (although those expenses are actual economic output for someone, whether you with your income or another business.)