The latest news this morning is that up to two thirds of US corporations pay no income tax.

Naturally, the headline might lead one to conclude that corporations are gaming the system to get out of paying the tax man. Well, many probably are, but you should take this news with a couple of grains of salt:

1) Lots of small business have pass through taxation. This means that corporate profits are given to owners and where they are subject to individual income taxes. Also, most corporations in the US are small businesses. According to the Washington Post, of the 1.3 million corporations in the study, only 998 were classified as large (1).

2) The law permits many corporations to report tax losses, when in fact they many be profitable. Right, in order to encourage investment, congress has mandated through the IRS that tax credits and deductions be available for certain industries. For example, some small business own residential real estate. The IRS allows one to deduct interest and operating expenses related to owing investment properties. In many cases, this results in a ‘tax’ loss, when in fact the company may be marginally profitable. Right, so the fact that 2/3rds of companies are not paying taxes is partly an accident of federal law.

Best,

James

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