# Taxes and accounting

Besides the owners, the singular most universal interested party in an organization is the government of that region.

- For that reason, accountants spend a *lot* of time understanding the relevant tax code for their [specialization](jobs-specialization.md).
- If you need one, a good tax accountant is typically worth what they're paid, but a bad one will likely cost more than what you'll save.

Unlike most other aspects of accounting, tax accounting can't be dogmatic to the point of perfectionism.

- An item may sometimes be expensed entirely, or it might be depreciated as a long-term asset.
- Expense categories may vary depending on what an accountant can justify to a tax auditor.
- Equity has *many* variations within tax law, meaning it works like any other form of law (i.e., [persuasion](power-influence.md) through [logic](logic.md)).
- The only requirement is that whatever the accountant is doing stays consistent across periods.

Most people do *not* need a tax accountant to file their taxes.

- Essentially, you don't need an accountant and can simply use software for the following:
  - Employment wages (W2)
  - Miscellaneous independent contractor work (1099-MISC)
  - Interest income (1099-INT)
  - Dividend income (1099-DIV)
- However, if your situation is *any* more complex, hiring an accountant is almost essential:
  - Complexities involving trusts (e.g., corporations) or [inheritance](hardship-death.md).
  - Cryptocurrencies, foreign income or any other semi-regulated or unregulated [investments](money-investing.md).
  - You [run your own business](entrepreneur-1_why.md).

## Property taxes

Property taxes are assessed ad valorem (according to value), usually yearly.

Realty - buildings or land

- Buildings can depreciate, but land can't.

Land value tax (LVT) - tax on the market value of the land itself

Non-realty (personalty) - jewelry, cars, business or [intellectual property](legal-ip.md)

## Transaction taxes

Transaction taxes are during a period when there's an exchange of property between parties.

Excise taxes

- Excise taxes are set on specific items to "cut off" people from using them.
- The most frequent excise tax is a 20% early withdrawal penalty for using money from a qualified retirement account before retirement age.

Sales tax - set on the seller

- Sales taxes are set on the seller, though the seller can add the price into the product.
- Use tax is sales tax from a different state.

Value-added tax

- For buyers, a tax on the purchase price.
- For sellers, a tax on the value they increased the product that was sold.

Gift tax

Taxes on transfers at [death](hardship-death.md)

- Estate tax is set against the estate of the deceased.
- Inheritance tax is set against the recipient.

## Employment taxes

Except for [self-employment](entrepreneur-1_why.md), most employment taxes are pulled out of someone's paycheck automatically and filed quarterly with the government:

- Social Security
- Medicare
- Unemployment tax

Most people below a modest income threshold receive a refund at the end of the year *back* from the government, which creates the ironic consequence of them being *grateful* to the government for their already-earned money.

- This compounds as well because there are certain tax credits (e.g., EITC) that give more money back to workers than they paid to the government.

## Income taxes

The US Federal income tax system has a complex, specific formula:

1. Income minus exclusions give **Gross Income**
2. Gross Income minus certain deductions give **Adjusted Gross Income (AGI)**
3. AGI minus standard/itemized deductions and personal/dependency exemptions give **Taxable Income**
4. Taxable Income references to the tax tables to calculate **Tax Owed**
5. Tax Owed minus tax credits, previous pre-payments, and withholding gives the **Tax Due/Refund**

Tax tables use a progressive tax bracket system:

- An example:
  - up to $10,000 = 5%
  - $10,001 to $25,000 = 10%
  - $25,001 to $45,000 = 20%
  - over $45,000 = 35%
- A $56,000 Taxable Income will pay:
  - 5% on $10,000 ($500)
  - 10% on the next $15,000 ($1,500)
  - 20% on the next $20,000 ($4,000)
  - 35% on the last $11,000 ($3,850)
  - Total Tax: $9,850

US State and Local income tax are adapted calculations off Federal.

Certain situations can increase the likelihood of a tax audit:

- Very high gross income
- Self-employed individuals with substantial business income and deductions
- Taxpayers with prior tax deficiencies
- Businesses with a large proportion of cash receipts

Many, *many* business expenses can deduct from taxable income:

- [Advertising/promotion](marketing.md)
- Alimony-related legal fees
- Automobile and transportation expenses
- Bank charges
- Commissions and sales expenses
- Consultation expenses
- Credit and collection fees
- Delivery charges
- Dues and subscriptions
- Employee benefit programs, including pension and profit-sharing plans
- Equipment rentals
- Factory expenses
- Gifts (to an extent)
- Home office
- [Insurance](money-insurance.md)
- Interest paid
- Internet domain names and hosting
- Job search expenses
- Laundry
- Licenses
- Maintenance and repairs
- Meals and entertainment (somewhat)
- [Moving](home-moving.md) expenses
- Office expenses and supplies
- Payroll, contract labor, and consulting
- Postage
- Print and copy
- Professional development and training
- Professional fees (e.g., accounting, legal)
- Promotion
- Rent
- Salaries, wages, and other compensation
- Security
- "Service fees" (for not-so-legal activities)
- Small tools and equipment
- Software
- Supplies
- Taxes
- Tolls
- Trade discounts
- Travel
- Utilities like telephone, internet, and electricity

Though it's sometimes more complex, other write-offs and write-downs can offset tax expense as long as they're in the same tax year:

- Depreciation on assets
- Amortization or expiration of [intellectual property](legal-ip.md)
- Bad debt
- Charitable contributions
- College or trade school
- Continuing professional education
- Government bond dividends
- Losses on sold securities
- Prior-year losses
- Prior-year taxes paid
- Reinvested dividends
- Renewable energy credits

The US income tax code is configured to [socially engineer](people-rules.md) a specific set of lifestyles:

- [Employees](jobs-1_why.md) > [Entrepreneurs](entrepreneur-1_why.md)
- [Teachers](education.md) > other [careers](jobs-specialization.md)
- Going to [college](jobs-college.md) > skilled trade
- Maxing out [retirement account](money-investing.md) contributions
- [Parents](parenting-babies.md) of 2-3 children who stay home and go to college

## Other taxes

Government customs taxes set on foreign goods:

- Duties are indirect taxes charged to organizations, who then pass it on to the customer.
- Tariffs are direct taxes against specific things.
  - Before the US income tax, most of its income was from tariffs.

Franchise tax is set against corporations.

Occupational fees are set as [trade-related](jobs-specialization.md) requirements.

Carbon taxes are against productive activities that generate carbon.

- Sometimes, a government can grant carbon credits, which can be exchanged as a commodity between companies based on need.

## Tax games

Any tax payment is a completely sunk cost, so anyone who can explore tax advantages will try to avoid taxes.

- Tax planning is usually best during low-income years, where a net operating loss (NOL) can be carried over into future years.

Increasing expense (and therefore reducing income) is the easiest approach to save on taxes.

- Substitute salary for [stock options](money-investing.md).
- Donate to charitable corporations (which may include [political parties](politics-conservativeliberal.md)).

Tax shelters are government-approved domains that protect from taxation:

- Qualified retirement accounts (e.g., 401(k) or IRA).
- Qualified retirement plans (e.g., pensions).
- Government bonds, along with their income.
- Real estate, in some situations.

Tax treatments aren't technically "accounts", they earmark assets to specify unique ways to tax them, and most individuals have a very specific ideal order they should max them out:

1. Anything up to the match an employer gives, such as 401(k) and IRAs.
   - An employer match contribution immediately doubles everything invested into it.
2. Tax-deferred treatments:
   - Taxing the assets when withdrawing them means constant trades without any tax risk, then paying taxes before using it.
   - This is ideal when you don't expect a dramatic increase in your income.
   - 401(k)'s/403(b)'s are through a corporation or non-profit/government.
     - The options are specifically limited for employees (about 20 or so).
     - Never borrow on a 401(k) or you'll be hit with a ~40% loss when you leave the company.
     - If the options are limited, look beyond that plan for your investing needs (such as an IRA).
     - If the match is very low (such as 1%), its fees may make it an unwise investment.
     - If the company doesn't match the contribution, use an IRA instead to save on fees.
   - When [leaving a company](jobs-6_negotiating.md) with a 401(k), always perform a rollover into an IRA.
     - Taking the money home will tax it when you cash the check.
     - Your choices are limited if you roll it into *another* 401(k).
     - Calculate if it's worth converting to a Roth IRA.
   - A 457 is similar to a 401(k), but for government and certain non-government entities.
   - IRAs (Individual Retirement Arrangements) are a tax treatment that can apply to nearly any type of investment.
     - They have a bit more range of investment vehicles for [investing](money-investing.md) than other arrangements what you can invest into.
     - If you have an earned income, you can have an IRA.
     - SIMPLE IRAs are funded mostly by an employer.
     - SEP IRA plans (Simplified Employee Pension) can be set up with any business, even self-employed.
   - 529 Plans are meant to save for college.
     - Only use a 529 that leaves you controlling your account all the time.
3. After-tax treatments:
   - Taxing the investment beforehand means the returns aren't taxed (e.g., Roth IRAs, Roth 401(k)).
   - This is ideal if you're making less than when you'll retire.
   - If a [parent](parenting-children.md), consider the Coverdell Education Savings Account (ESA).
     - As long as the money pays for college or education-related expenses, withdrawals don't have any tax liability.
     - Never buy an ESA that freezes options or automatically changes the investment from the age of the child.

It makes sense to hire someone for work, such as a family member.

- However, they *must* do some sort of work, or it's a no-show job.

One simple method is to geographically route business activities to the most tax-advantaged locations.

- Rent an office in another state and make it the company headquarters.
- Move operations to other countries with little to no tax for those activities.

Many governments provide capital allowances and tax credits for specific activities.

- Specific, [fashionable](trends.md) industries and activities tend to receive tax credits.
- Lately, [energy-efficient and "green" activities](politics-leftism-sustainability.md) have received plenty of government grants and advantages.

If an organization is savvy enough and has enough startup costs, they can create a not-for-profit charitable organization with a board run by hand-picked people loyal to their founding organization's leadership.

- Whenever a company is about to experience significant tax expense, they can make a charitable contribution (typically at the end of the year before the end of December) that offsets tax payments.

An Employee Stock Ownership Plan (ESOP) is an odd domain that allows completely tax-free transfer of company equity:

1. Convert an existing, profitable company into an S corporation with company stock.
2. Create an ESOP trust that can own company stock.
3. The ESOP trust acquires a debt from the company, then purchases a giant chunk of the company (or all of it) from the owner, making it an S corporation owner and the company owner wealthy.
4. Every year:
   - The company does a stock valuation of itself.
   - The ESOP administrator tracks everyone's income as a percentage of total payroll expense.
   - The company makes a predetermined contribution to the ESOP, which it immediately uses to pay off some of its debt to the company.
   - That debt payment releases a fixed number of shares to a suspense account.
   - The shares are evenly distributed into the employees' retirement accounts.
5. When the employees reach retirement age, the shares are converted into cash and distributed (typically in installments).
6. The *employees'* former shares that were converted are redistributed, just like in Step 8.
7. If the debt is ever fully paid-off, the ESOP acquires another loan from the company.
8. As long as it fulfills the requirements for a retirement plan, the company is owned by its employees while they work there.

Wealthy individuals have several progressively more favorable routes to reduce taxation:

1. The conventional means of reducing wage income, then receiving income tax on the remainder.
2. Strictly receiving company stock as income, then selling the stock and paying comparatively lower capital gains tax on it.
3. Strictly receiving company stock as income, then using the stocks as collateral to borrow money, then spending borrowed money (which is untaxed) while still receiving unrealized capital gains.

Even then, tax evasion is a frequent practice:

- Migrate money in between a vast network of banks to hide the record, often across national boundaries.
- Involve many associates who serve as board members of various entities.
- Use accounting across multiple nations, and with different legitimate accounting standards each time.

While most income tax code requires you to pay at least *some* portion of your income, Section 121 gives a free opportunity:

1. Purchase a home and live in it for at least 2 years within a 5-year window.
2. Sell the house while carefully documenting every transaction associated with closing costs.
3. Up to $250,000 in capital gains (or $500,000 if married filing jointly) can be excluded from taxation.
4. This can be repeated every 2 years.