Uber has never once turned a profit, and is allowed to continue running their business. If you’re a small business owner running an ebay or ecom business, and you claim losses for 3 out of 5 years in a row, it’s likely that the IRS will audit you, and could deem you a hobby. Amazon is often cited as not generating a profit for many years, but is now profitable. For them, it was somehow okay to run a business making no profit! So like, how come small businesses can’t claim losses, but big corps can?
There is nothing preventing business from running without making a profit as long as they pay any expenses or bonds that are due.
The current tech setup depends on high stock valuations. They issue stock, sell it at a high rate and use that to pay expenses. The sale of stock does not count as net positive in revenue since they are effectively selling a part of their business to investors, making them “owe” their new shareholders equal the amount they gained from them.
As long as investors are interested and the business is growing it’s possible to keep this going for a long time and never pay taxes since they spent everything they gained.
If they are not able to pay their expenses they will have to file for bankruptcy like every other business, whether it’s restructuring bankruptcy, transfer of ownership of dissolution.
So why can’t small businesses do the same? They absolutely can, but the money they get from selling stock is nowhere close. These tech companies are sold sometimes at 20x the revenue where small businesses are likely going to get 20x profit or less.
Oh, it starts already as cancer?
I think most tech companies are over valued, not gonna lie. In a hypothetical situation where you know all future dividends of the company the value of the share should be the sum of the future dividends discounted by number of years at an interest rate. If the company is never going to pay out dividends then it’s “real value” is zero.
“Real value” as in it has no value as a commodity like gold or a collectors item. Looking at you Tesla.
And the same thing is true for private businesses, most of the time they’re only private in the sense that the “shares” aren’t listed on the stock market, there’s still a bunch of investors behind the scene that each own a certain % of the company, it’s not just the figurehead that acts like they’re the sole owner (see Twitter with Musk and the documents released recently showing how much money for the purchase came from third parties).
Because they manage to attract investment.
As long as investors are willing to give cash in exchange for equity, a company can operate on that cash and run at a loss.
To clarify further, in the US, the IRS cares about the big businesses too and they get audited, at least, yearly by law. Also, small businesses can still operate if they have the capital to do so. The IRS is concerned about ensuring no laundering or otherwise nefarious activities are going on, which is why they get the spotlight when running in the red consistently.
they get audited, at least, yearly by law
The IRS doesn’t audit annually, companies hire 3rd party auditors. And it’s not a tax requirement, it’s a public-company requirement.
Small businesses absolutely can, and should claim any valid expenses. In theory audits are not punishments. They happen to large companies too. But in practice small businesses often don’t have full time accountants keeping their records and some receipts are lost after the cost has been reported.
Like many compliance regulations bookkeeping has costs that larger business are easier able to bear. Small businesses do get some aid notably a lot of money went out during covid, but big businesses have the people and resources to take advantage of that aid more than a solo proprietor who wasn’t even aware. Although small businesses never seem to get those “to big to fail” bailouts.
To touch on the hobby point if you run a business 40 hrs a week and lose twice what you make a year the IRS probably won’t mind. But if you’ve got 3 businesses you use to right off expenses (like craft brewing equipment, leather working tools, or art supplies) and you only have ever sold a single belt on Etsy over the span of a year they’ll probably have an issue.
But in practice small businesses often don’t have full time accountants keeping their records and some receipts are lost after the cost has been reported.
Not to mention large businesses can spend more money on lawyers that are able to drag out court cases through delay tactics and are far more likely to get the government to settle.
Because big corporations are better at paying off governments than smaller businesses.
Governments aren’t the ones paying big tech, they protect monopolies if that’s what you mean. Even then that’s dubious with what’s happening recently in europe and America
No, I’m saying large corporations pay off governments, which is absolutely true.
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Amazon pays taxes. Less than what they should? Yes but they are paying https://www.cnbc.com/2020/02/04/amazon-had-to-pay-federal-income-taxes-for-the-first-time-since-2016.html
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I’m not up to speed on how US tax laws work. What does getting deemed a hobby entail?
Think of someone who makes small crafts and sells them on some online platform. Someone who does this as a business will keep track of their materials costs, and subtract them from their sales cost, only paying taxes on their actual profit.
But the IRS will only let you do this if they determine your intent is to make a profit. If they think you are purposely just selling enough to cover your materials, but using most of the materials for yourself, they can tell you that you never had an actual business in the first place, and that all that deducting of expenses never should have happened.
Seems like it’s completely subjective, too. I’ve seen many posts on reddit about people being shafted by the IRS and forced to pay back a ton in taxes even though it was a legit effort to run an actual business, simply because they don’t “think” it’s a business
It’s hard to get a good read on these things. You’ll only see the perspective of the person that thinks they were cheated by the IRS. The IRS won’t make Reddit posts about people carrying out tax evasion.
Likewise you say the IRS dont think it’s a business. They probably carry out much stricter measures than that. Probably much stricter than the people complaining on Reddit. The people complaining also only “think” it’s a business.
IRS will audit you, and could deem you a hobby
Are there any negative consequences? I’d prefer to be downgraded to a hobbyist. Instead, the government has increased my taxes to around 70% of my yearly revenue. Social democracy, fuck yeah!
Profitability is just a proxy for whether someone is legitimately running a business, or just trying to save money on their hobby. Businesses can deduct expenses, hobbies cannot.
So if you are running an etsy store or an engineering company and buy a 3d printer to make parts, the cost of that 3d printer is subtracted from revenue for tax purposes. If your “business” is actually a hobby, it’s not legally a business expense and therefore it’s not deductible
(In the USA)
This is a great explanation for why business deductions are stupid in the first place. Why does being profitable justify being even more profitable by paying fewer taxes?
This is a great explanation for why business deductions are stupid in the first place. Why does being profitable justify being even more profitable by paying fewer taxes?
Winner takes all, I guess? Amazon has been so successful they became a literal monopoly (don’t care to argue semantics of it, this is my opinion), and employs hundreds of thousands of people. They’re so successful that the impact of causing them to pay their fair share might impact the economy in a larger sense. So they just let them have way more freedoms than small businesses?
3d printer is subtracted from revenue for tax purposes
That makes sense. Since my profits always oscillated around zero, claiming any expenses had no practical effect.
legitimately running a business, or just trying to save money on their hobby
That’s actually how it started. We’ve installed linux on some old desktop machine with my classmate back in school, set up some services like webhosting, mail, jabber, and started to give access to people for free. No guarantees, no pressure. As we finished school, trying to turn it into a business was a logical next step. It never went big, but we just kept the thing around, bought newer hardware, moved it to a proper housing, did basic maintenance, and years later, here I am owing to the government thanks to my highschool hobby.
I’m not sure I understand why turning it into a business was the next step unless it was 1999. That market was saturated almost immediately. The web hosting may have had some potential, I guess.
It sounds more like you fell into exactly the situation that these laws are designed for—you had a big hobby, thought that made it a business, didn’t have a plan to make real money with it, and inadvertently may have committed some light tax evasion if you claimed anything as an expense. Hence, audited.
An audit isn’t an accusation of guilt, it’s an investigation into unusual or unorganized practices, which is exactly what you described doing.
Yes. Screw the small businesses. All that competition is just fraud and burden to the real corporations :D /s
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Well, I fell into a bracket that’s taxed (it’s not officially called a tax, but that’s what it is) by a certain fixed minimal amount. Thanks to my total revenue being relatively low, it makes an absurd amount percentage-wise.
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