2/3rd of U.S. Corporations Don't Pay Taxes--because they're S-Corporations?

  • Posted by a hidden member.
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    Jul 13, 2014 6:33 PM GMT
    This point was made several times in the comments about Warren Buffett’s taxes: that two thirds of US Corporations don’t pay the federal corporate income tax. It’s one of those things which is entirely true and also entirely misleading.

    Those who wave the factoid around seem to use it to show that we shouldn’t consider corporate tax rates, nor where the incidence of such taxes fall, for as so few corporations pay the taxes they’re irrelevant. Or for the more hardline, that this is some unspeakable outrage showing that business is getting away with something at the expense of hard working Americans.

    The number itself comes from a GAO report to Congress back in 2008.

    Nearly two-thirds of U.S. companies and 68% of foreign corporations do not pay federal income taxes, according to a congressional report released Tuesday.

    The Government Accountability Office (GAO) examined samples of corporate tax returns filed between 1998 and 2005. In that time period, an annual average of 1.3 million U.S. companies and 39,000 foreign companies doing business in the United States paid no income taxes – despite having a combined $2.5 trillion in revenue.

    It’s all absolutely true so why is it horribly misleading? Misleading to the extent that I would accuse some of those using the line, those who do in fact know better, of coming quite close to lying.

    There are, conceptually, two ways we could tax an organisation. These alternatives can be applied to anything from a bowling club to General Electric. The first is that we consider the organisation as an organisation and tax it accordingly. What goes on inside the organisation, any surpluses or profits, get taxed at the level of the organisation.

    We could also decide not to do that. Instead, we’ll look at who gets money from the organisation and tax them instead. Conceptually, there are merits to either system: and we do in fact tend to use both. Interest paid out of an organisation we tax when it gets to the recipient: interest income is income that you pay taxes on. Profits made by an organisation sometimes get taxed at the level of said organisation, sometimes when they reach the recipients (or, as I pointed out with Mr. Buffett’s taxes, both in the corporation and when the dividend reaches the recipient).

    And it’s that “sometimes” which gives us the figure of nearly two thirds of corporations not paying the federal corporate incomes tax. For we have two types of corporation, the C and the S Corporation.

    A C corporation is taxed at the level of the corporation, the organisation. It is subject to the federal corporate profits tax on any profits that it makes. An S corporation however is a different beast:

    An S corporation, for United States federal income tax purposes, is a corporation that makes a valid election to be taxed under Subchapter S of Chapter 1 of the Internal Revenue Code.

    In general, S corporations do not pay any federal income taxes. Instead, the corporation’s income or losses are divided among and passed through to its shareholders. The shareholders must then report the income or loss on their own individual income tax returns. This concept is called single taxation; if the corporation is taxed as a C corporation, it will face double taxation, meaning both the corporation’s profits, and the shareholders’ dividends, will be taxed.

    I deliberately use the Wikipedia entry as my source to show that this isn’t some secret and arcane piece of information. It’s generally and widely known. So S corporations aren’t subject to the corporate income tax at all: the profits are taxed as income when in the hands of the shareholders instead.

    So, what proportion of US corporations are S rather than C? The IRS can tell us that:

    S corporations continue to be the most prevalent type of corporation. For Tax Year 2003, about 61.9 percent of all corporations filed a Form 1120S. The total number of returns filed by S corporations for Tax Year 2003 increased 5.9 percent to nearly 3.3 million, from nearly 3.2 million reported in Tax Year 2002. S corporations became the most common corporate entity type in 1997.

    Nearly 62% and rising: that’s close enough to our reported number of “nearly two-thirds” (ie, 66.66%) that it’s not exactly a great intellectual leap to identify this as the source of that “two-thirds” number.

    End of article: http://www.forbes.com/sites/timworstall/2011/08/16/two-thirds-of-us-corporations-dont-pay-federal-income-tax-true-but-horribly-misleading/
  • Posted by a hidden member.
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    Jul 13, 2014 7:42 PM GMT
    Would this have anything to do with the popular share buyback program?
    Its like they are crazy- greedy, how do you tax a cash pile not yet spent?


    The Power of Share Repurchases
    http://www.millennialinvest.com/blog/2014/6/23/the-power-of-share-repurchases

    U.S. companies are sitting on cash that is the equivalent of 24% of their combined market capitalizations as of April, 2014, so buybacks figure to continue in force in years to come.
  • conservativej...

    Posts: 2465

    Jul 15, 2014 10:17 PM GMT
    Actually the tax burden of the S Corporation as it used to be called is passed to the owners of the corporation who pay the taxes at their personal income tax rate. Your distribution of the S Corporation tax comes via a K-1 as the proof of income document.

    Of course, I would think most of RealJock to be ignorant of that fact.
  • tj85016

    Posts: 4123

    Jul 15, 2014 10:56 PM GMT
    scruffLA saidWould this have anything to do with the popular share buyback program?
    Its like they are crazy- greedy, how do you tax a cash pile not yet spent?


    The Power of Share Repurchases
    http://www.millennialinvest.com/blog/2014/6/23/the-power-of-share-repurchases

    U.S. companies are sitting on cash that is the equivalent of 24% of their combined market capitalizations as of April, 2014, so buybacks figure to continue in force in years to come.


    dude they can't have more than 100 shareholders and profits and losses are allocated to shareholders proportionately to each one's interest in the business.

    so what's the point?
  • Apparition

    Posts: 3534

    Jul 19, 2014 3:16 PM GMT
    It would be more fun to tax share value. Get the main players to submit what they think their personal shares are worth and tax at a percent of that to the whole corporation. To prevent them under rating them, this would also be a shotgun offer, meaning the government could accept the price as an offer to buy at that price, and flip them, as well as the tax. Lol.