There are no corporate ‘loopholes’ in the tax code. It’s much worse than that.
“Closing corporate tax loopholes” is a phrase bandied about by lots of progressive, liberal, Working Party members, and Democrats concerned about corporations getting a break on their taxes. I recently saw the phrase in a story about property tax relief, in a comment arguing that Cuomo’s plan for a property tax credit fails to close “corporate tax loopholes…” to pay for the idea. (see http://www.democratandchronicle.com/story/news/local/2015/01/14/cuomo-proposes-property-tax-credit/21778177/)
Here’s the thing: There are no “corporate loopholes”. Not really. Rather, the way the tax code treats corporations is fundamental. A loophole suggests an ambiguity or inadequacy in the tax code that is used by corporations to avoid paying taxes. There is nothing ambiguous about the treatment of corporations in the tax code. It is written in full understanding and total support of the notion that the corporate form exists almost exclusively to limit liability and diminish the burden of paying taxes.
According to IRS Publication 542,
“Rules on income and deductions that apply to individuals also apply, for the most part, to corporations. However, the following special provisions apply ONLY to corporations:
- Capital expenses can be deducted as start-up costs, and the rest can be amortized (gradually write off the initial cost of the asset).
- Income from qualifying shipping activities can be excluded totally from gross income, if the corporation elects to be taxed at the highest taxable rate on its “notional shipping income.”
- There’s an energy efficiency deduction for corporations that used more efficient energy systems on commercial property, like heating and cooling systems.
- Corporate preferences are granted for mineral and timber depletions. Here’s the language:
Depletion is the using up of natural resources
by mining, drilling, quarrying stone, or cutting
timber. The depletion deduction allows an
owner or operator to account for the reduction
of a product’s reserves.
See http://www.irs.gov/pub/irs-pdf/p535.pdf Chapter 9, Depletion.
- That’s right! Corporations get a deduction for sapping the Earth of natural resources, apparently because the IRS is concerned the corporation won’t get endless use out of its victim, the planet.
- A corporation can deduct up to 70% of dividends received when it owns less than 20% of the company giving the dividend to shareholders. If it owns more than 20% of the company issuing the dividend to its stockholders, it can deduct 80% of dividends from taxation.
- When a person gets a windfall as an individual, typically he pays MORE than usual in taxes. Not 70-80% less….
- If the corporation received a below-market loan, and uses the proceeds for its business, the foregone interest could be deductible.
- Let me break this into definitions: a below-market loan is one in which no interest is charged, but which is considered as a loan where the borrower is required to pay interest at the federal rate and to pay an additional payment of the foregone interest.
- Foregone interest is the interest that would be payable if interest accrued on the loan at the applicable federal rate, minus any interest actually payable on the loan for the pay period.
- This reads, to me, like this: borrower got a killer deal, but the fine print said “but pay the taxes on this” and the IRS tax code smoothed the wrinkled brow of the Corporation and said “Shhh. don’tchu worry about it, baby…”
- Up to 10% of taxable income can be shifted into charitable contributions.
- Capital losses are not only deductible; they are flexible as to the year they are claimed. So if the loss is greater than the gain, and it can’t all be claimed as a deduction in one year, the part that is not deducted can be claimed in another year. (Go time travel transaction, go!)
- The best sentence in Publication 542? ..the one that makes the priorities of the IRS tax code clear, and what type of tax payer gets special treatment?…..
- “The tax laws give special treatment to some types of income and allow special deductions and credits for some types of expenses. These laws enable some corporations to significantly reduce their regular tax. The corporate alternative minimum tax (AMT) targets these corporations and attempts to ensure that they pay at least a minimum amount on their economic income.” See http://www.irs.gov/pub/irs-pdf/p542.pdf at pg. 17, Alternative Minimum Tax.
- This reads to me like: “Hey, um, the law gives you rich folk special treatment and we noticed that so um, respectfully, that is, we’re going to try to ask you to pay at least a tiny bit of tax, if that’s ok with you…unless your gross receipts were only 7.5 million. And then you-all are exempt.”
- Credits also exist for corporations. They include (this is not an exhaustive list) a foreign tax credit, an electric car credit, general business credit (included on this list is ‘investment’, ‘reserved,’ (doing something with income, not doing something with income) …and a laundry list of ways income can be spent: increasing research activities,…low sulphur diesel fuel production…refined coal production… distilled spirits… agricultural chemicals security…). See http://www.irs.gov/pub/irs-pdf/f3800.pdf 2
- In other words, the general business credit list is filled with special interest porkyporky pork (social policy) pork. It all means lower taxes for the corporation
The above is not an exhaustive list of the benefits the tax code confers on corporations. It is irksome to hear politicians talk of closing “loopholes.” If they care about individuals being on equal footing with corporations, they will stop acting like the law is ambiguous and confusing and as such, and by way of that ambiguity, is helpful to corporations. I am not a tax attorney nor an accountant, and I summarized some of the grosser benefits of the tax code for corporations in less than 12 points. The tax code is not ambiguous. The tax code is simple, clear, and unfair.