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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.
Thanks for the clarification. It's a very important distinction.
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).
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.
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.
The difference may also be how the business is structured. Personal vs a corporation (LLC or otherwise).
Yes there is a difference, but LLC is a legal concept, not a tax one. The IRS taxes sole proprietors the same whether or not they have an LLC.
Tax entities include sole proprietorship (default), partnerships, s corps, c corps. Any of those can be LLCs, but they don't have to.
Yes the main appeal of a LLC is that you aren't liable if your LLC gets sued. As a sole proprietor if someone slips and falls in your store they can recover damages from you personally. As an LLC they can only get the business's funds.
This means that even if awarded damages from a civil case tanks your business your won't be out of a home and your personal bank accounts are safe (not considering the burden of lossing your source of income).
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.
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?
Why does being profitable justify being even more profitable by paying fewer taxes?
It's not about encouraging profitability (that only one proof of a real company) as much as allow businesses to grow, without people faking businesses to write off personal expenses. Properly reporting expenses can allow new or growing businesses to reinvest in themselves. I agree that there should be a different structure for large business but I'll give a hypothetical to outline why it's important for small businesses.
Let's say a new family owned machineshop does $200k in sales in its second year. Pre-tax after all other expenses the business has netted $50k. Post tax (-$40k) they've got $10k left to reinvest. They want to buy $20k worth of machinery to grow the business. If they can deduct $20k for the machinery from the $40k in taxes the can buy it. If not they can't.
Meanwhile the large international conglomerate machineshop down the road makes $400k a year post tax. If the want $20k in new machines they just buy them. This isn't because they run a better business w/ better margins or product but because they have more volume.
Properly reporting expenses can allow new or growing businesses to reinvest in themselves.
Why is that a thing for businesses and not regular people? Why is it important for someone to pay 10% on a knife purchase, but a business doesn't need to pay the same thing when both situations end up with owning a knife?
The Federal government doesn't have a sales tax on consumer purchases goods that they charge regular people (-a few very specific things). Most sales taxes are done by states, some states have none.
And the business isn't dodging paying sales tax w/ deductions because again most things they spend money on aren't being taxed on purchase. They're having their amount of income the government can tax reduced as a reward for investing in themselves to promote economic growth.
Also private citizens have tax credits (which are preferable to deductions) too if they purchase certain things like EVs. If you buy a new EV the government will give you a few grand.
The IRS wants to encourage productive economic activity. Letting businesses deduct expenses can mean that later they end up employing people who buy stuff and themselves pay taxes.
Also cottage industries that barely pay for themselves are very inefficient and governments usually want to discourage them so you'll do something more economically productive with your time.
The IRS does not write tax laws.
Trickle down economics never works.
Under the Administrative Procedures Act they get to create rules to interpret the law. Which enables non elected officials who work there to make changes to how laws are implemented to meet their understanding of best policy.
https://www.regulations.gov/search?agencyIds=IRS&filter=Deductions%20
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
Talk to an accountant if you haven't it sounds to me like you may be able to claim some deductions.
If for every $100 gross income you make you pay $20 in taxes and $80 in expenses you may be able to claim some of your expenses to reduce your tax burden.
What country is this?
A hobby is not a business and cannot deduct expenses to lower taxable income
In the USA, there are tax breaks regarding expenses. A big one is that, because the USA does final sales tax instead of VAT, a business can buy goods without paying sales tax as long as they aren't the final point of sale.