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Author: DrtThrwingMonkey Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 214567  
Subject: Re: Summoning the Board Geniuses Date: 3/23/2013 7:34 AM
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In each of these cases though I was an employee of the company and not an owner so there was a natural barrier to abuse. If an employee decided to get $1000 italian loafers instead of the standard $75 workshoe the company wouldn't allow it since it was an expense to them. The company wouldn't purchase a $150,000 Mercedes for its employees when a $25,000 car would do.

For the "personal corporation" discussed in this thread though there wouldn't be that natural barrier to abuse as to what was work related and what wasn't. That would entail setting up a whole host of vague and arguable rules to fight over leading to a bunch of administrative hassles.

Instead, a %35 corporate rate is much simplier. Again, it is an ugly distortion. But it offsets the ugly distortion of how corporations can used to hide from taxes.



I looked up some of the rules for meals, clothes, transportation and daycare, and they are different from country to country, and somewhat complex. The general rule, usually followed, is that if a company is asking the employee to do something a little unusual, like wear a uniform or protective clothing, eat at odd hours or be available during meals, travel for meetings with clients, etc., then they can pay for these expenses without the benefit being a taxable benefit. For 'benefits' like a party or an office barbecue, there is a 'de minimis' rule, for instance, gifts under $50 do not get taxed, but bigger gifts do.

Daycare is a bit of a weird one, in the States, since it is generally not taxable if it is provided by the employer, but it is taxable if it is provided by a third party, if I understand correctly. Canada also has this bizarre concept, which seems to contradict the general principle. But note that this bizarre and arguably unfair exception to the rule (perhaps to encourage employment daycare?) exists already, and is not some danger that is unique to a single taxation world. (I looked to see what happens at Google, and it is not a good example, since it is not free, it is charged to employees, in fact it is hugely expensive for them.)

It is true that there is a natural barrier against abuse when the owner of the business is not the same person as the employer. But in most countries, the $15,000 shoes would never be allowed as a corporate expense. True, it would have to be audited for it to be caught, but if it's illegal, most people won't go way over the boundary like that. The more serious problem would be for regular shoes to be billed to the company, as a work expense.

I don't know enough about the details of tax policy from country to country to comment extensively, but my accountant assures me that meals, clothing, regular to and from transportation and daycare would almost never qualify in Canada, so there is no tax savings available to me, despite the fact that all my income goes through a corporate structure before it gets to me as salary or dividends. Perhaps this is abused in the USA, and someone has experience with it? If so, it is a correctable problem.

Others in this thread (Ravi, Manlobbi) have made a good case for keeping corporate taxes, paid at the corporate level, with a deduction available at the personal level so that taxes are not paid twice. This is partially the case in the US already, where dividends are taxed less heavily than regular income, although it allows opportunists like Buffett to claim that he and Romney pay less taxes than his secretary. It is also the case in Canada and, as I understand from Manlobbi, in Australia. It seems like a good way of limiting tax avoidance or making sure foreign shareholders share part of the tax burden in the country where the profits were made.

I should also point out that the situation that Umm fears, where single owner corporations will pay for many personal expenses to avoid taxes, seems to exist already, if that really is an opportunity allowed for by the US tax code. After all, corporate taxes are applied to profits, not revenues, so if you can pile up a lot of personal expenses and apply them against corporate revenue, you will not pay taxes at any level. We have been talking, in this thread, about harmonizing personal and corporate taxes so that the same profit is not taxed twice. The bogus expense issue would be a problem in any tax scheme where profit is artificially hidden, de facto paid out in $15,000 (or $75) shoes instead of as a paycheck.

Regards, DTM
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