A lot has been made of the latest GAO study showing that more than 2 out of every 3 businesses in the United States pay no business Income Tax. Heck, my kneejerk reaction was that they created AMT over 155 high-income individuals who managed to pay no taxes, yet 2/3 of businesses got away tax-free?
Well, then I got to looking at the story.
First, let me review a couple of accounting and tax terms. Gross Income, Revenue, and Sales are terms that describe all the money coming in, before expenses. Deductions are things the IRS lets all of us — individuals and businesses alike — take out of our income. Expenses are the cost of doing business; individuals can’t deduct their expenses, but businesses can deduct a lot of expenses (including money paid to employees, rent, cost of goods for sale, etc.). Net income or profit equals Revenue Minus Deductions. If you want to know way too much about the kinds of things businesses can deduct, the IRS publications 334 and 535 are just the beginning. For now, Revenue – Deductions = Income is all we need to remember.
Just like us, and many people forget this basic fact, corporations and individuals only pay income taxes on income. You have deductions, even if it’s just the standard deduction and your allowed exemptions; so do businesses. Just because somebody sold a lot of product doesn’t mean they made a lot of money. There’s the cost of making or buying the product. There’s the cost of the employees. There’s insurance premiums. There’s shipping. Advertising. Accountants and Lawyers. Permits and licenses. Some of these, you can take advantage of too — if you have enough deductions to make itemizing a good idea. You can even deduct the cost of TurboTax on your taxes!
But I digress. Just because these businesses took in money doesn’t mean they made money. They might have lost money!
Another factor in play is that the majority of American businesses are in fact small businesses. The CNN article referenced above points out “Generally, many small firms, because they do not have shareholders, are able to shift corporate income to individual income.” So instead of paying a corporate income tax, they file a Schedule C with their regular 1040. They aren’t getting out of paying taxes, they’re just using a different form.
And the last thing I want to say about this is that just because a company (or individual) isn’t paying income tax doesn’t mean they aren’t paying any taxes. They still have business licenses and regulatory fees; they still may pay sales tax on many items; they still pay property taxes; if they have employees, they pay withholding taxes and Social Security taxes and Unemployment Insurance taxes; in some states they have taxes on gross revenue to pay. All those taxes, by the way, are tax deductible for Federal purposes.
As an aside, I would like to address the idea of a windfall profits tax on oil companies. Critics say that this would result in oil companies deliberately bringing less petroleum to market, making oil and gasoline prices worse, since paying taxes is far worse than making money. I disagree. The title says it all: windfall profits tax. Oil companies can get out of paying it by simply making less money, spending more money on things like exploration and building refineries — activities that would incidentally help the economy and bring down fuel prices. In fact, the actual Senate bill defeated earlier this summer “would create a 25 percent windfall profits tax on companies that don’t invest in renewable fuels or electricity production.”
In closing: disaster tourism (of course you could see Pripyat much cheaper and more safely by playing Call of Duty 4; Yes, we are having a recession; awwww, it’s a problem to untangle air traffic across the freaking nation by having planes fly over a really swank neighborhood at 6000 feet; parental consent for abortion laws don’t work and destroy lives; the last word on the Teen Mom Pact (if only!); it turns out that the “OMG teh complications!” argument against Gardisil doesn’t work, because Gardasil has half the complication rate of most of the vaccines we line our kids up to take (what part of “would I rather give my daughter a shot or possibly watch her die of cancer?” is hard?); good thing NPR is radio, because the photo undermines the message; how the heck did Rachel Ray get to be a top earning chef?; Yes, Social Security will be paying out for years to come; and no surprise, Americans are driving less.