The current tax system imposed on corporations by the U.S. government is at best, a biased system; for corporations that have a net profit, taxes on those profits amount to a full one-third. So, if you’re doing business as a standard “C” corporation, and you do manage to make a profit, you’re going to owe Uncle Sam about 30%. Now, you add to that tax a capital gains tax that is levied on the investment capital of that corporation, and you have the makings for a tremendous tax liability, or do you? The actual income tax paid by corporations and the tax paid as a capital gains tax has diminished tremendously over the last thirty or forty years, and apparently not many of the citizenry of this country, nor the media are asking any questions. The general public doesn’t ask because for the vast majority and understanding of corporate taxation is non-existent; why isn’t the media asking? That’s another issue altogether.
The first thing you must understand when dealing with the corporate tax structure, is that for the most part, many large corporations do not pay the complete 30% tax that would typically be levied against an individual if they were in the same situation; corporate accountants and the sheer process by which corporations must report their income, expenses, deductions, depreciation, dividends, and any other financial transactions allows for huge deductions that typically offset any tax due. This concept is a major topic of discussion today, as we attempt to better control and regulate corporate accountability for their finances.
As for the capital gains tax, it is at an all time low, and President Bush has given corporate America and even greater gift of capital gains exemption on foreign income. Could you imagine how excited the average citizen would be to find their income had been exempted for a couple of years from tax? Don’t look for that to happen any time soon, as the average guy doesn’t have expensive lobbyists in Washington working for them.
When you have large corporations that are obviously reporting earnings and paying dividends, yet they pay no tax, you should be tipped off to the fact that there is a problem. How to fix that problem, may be another subject altogether.
The latest proposals have been to eliminate the corporate tax altogether. This would leave only the capital gains tax, and would shift the tax burden to the individuals of this country; that is a tremendous shift from the post-war era of the Second World War, when corporations and individuals shared the responsibility almost equally. Thanks to the lobbying done by corporate lobbyists over the last thirty years, we’ve finally reached the point of no return. The latest proposals have come from within the halls of Congress to eliminate corporate tax, and let the average taxpayer assume all the responsibility. Of course, these are the same individuals who voted themselves a pay raise in the face of a huge national deficit and a sluggish economy.
In case some of you have noticed, we as individual citizens are losing more and more of our take home pay each year, to taxes of some kind. Medicare, social security, and income taxes take a larger portion of our dispensable income each year. This would take a step closer to making even more of our income the property of the tax man.
What about this seems unfair? As pointed out by the individuals who are in favor of eliminating corporate tax, it would encourage capital investment and job growth in this country and that is absolutely true, it theoretically would do just that. But since when does theory actually work in practice? Communism works in theory. Many individuals believe it is simply another way to provide tax-free income to CEOs, and Board Members. The latest scandals such as Enron and HealthSouth have shown this country real hard evidence of the corporate abuses that are rampant in this country, and so far uncontrolled. The Sarbanes-Oxley Act has taken great steps toward greater accountability on the part of the corporate environment, but elimination of corporate tax is simply a legal way to avoid paying the tax.
When you factor in the ability of the wealthy and the corporate entities of this country to hire brilliant accountants that find loopholes in the tax system, and relieve their clients entirely of their tax liability, you cannot believe that the current system operates for the people, by the people, can you?
Flipping & Capital Gains
A common dilemma for real estate investors is the issue of flipping and taxes. In this article, we look specifically at the tax issues associated with flipping and capital gains.
In recent years, people have been looking at the real estate market as they once looked at the stock market, eyes filled with dollar signs. Flipping became a popular real estate investment strategy to make fast cash. However, one thing that people forgot in their haste to play the game was to be properly prepared with the knowledge to avoid paying high taxes on their profits. Towards that end, here's some noteworthy information about taxes as you think about your flipping strategy.
First, in order to avoid overly onerous "ordinary income taxes" on flipping properties you must have the property treated as a capital gain. Most often, if you sell the property in less than a year, you will be taxed at the ordinary income tax rate, which can be in excess of 35 %. Only when you've held the property for more than a year, does the long-term capital gains tax of 15 % (for most tax payers) come into play. In order to have the property treated as a capital gain you must show that you had no intention of flipping that property. Ironically, this could entail holding the property for this extended period of time which counteracts the whole point of flipping - which is to make money fast.
Also, it's not only about "when" you flip, but about "how often" you flip. If you flip too often, the IRS may view that this strategy is your "trade or business" and therefore the profits you make are subject to ordinary income and self-employment taxes. And you don't want that.
Secondly, if you want to employ other strategies to avoid big taxes like installment or structured sales or private annuity treatment while flipping, you can't. Spreading tax out doesn't work because the property is not labeled investment property. This again goes back to issue of holding periods and intention of sale.
If you are hoping to use the 1031 exchange strategy as the approach for flipping and capital gains, again you will find yourself between a rock and a hard place. 1031 exchanges are reserved for investment properties only and if you can prove, through holding periods and intention, that the property is a capital gain or investment property, you will not be eligible. The IRS supports investors and savers, not speculators and gamblers.
Once most of your tax deferral options are exhausted, your last resort for flipping and capital gains may be to have that property re-characterized to a capital gain property by moving in to it and treating it as your personal residence. It may work, but holding even longer holding periods apply.