I just got done looking at someone’s tax returns and for several years they reported millions in “negative” income… how is this possible when this person is a billionair.
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If someone is a billionaire then they can spend millions and not make any money. Therefore negative income.
Cause they lost money… You do realize billionaires can lose money too? Billionaires can afford to invest more which means that they can also lose more than an average investor/businessman.
I’m going to say “you” a lot in my answer, but keep in mind that “you” can refer to any taxable entity, whether that’s a person or a company. Also keep in mind that “your” income and your company’s income are not necessarily the same thing.
The difference between a billion and a million is about a billion. You could spend, set on fire, throw away, donate, be robbed of, or otherwise lose 10 million dollars every year for an average lifetime and still have a few million dollars left when you die.
How you report negative income isn’t all that complicated. Let’s say, hypothetically, that you own a chain of hotels. You commission a new building that costs 8 million dollars. Now let’s say that between the time it opens and the end of a taxable period, it only generated 4 million dollars in revenue. If you have no other source of income, then you *lost* 4 million dollars that year. It doesn’t matter that you started with at least 8 million or that your hotel will be expected to break even by a certain date. After all, the IRS taxes *income*, not money that you *have*.
This is true for all of your sources of income. Let’s say, hypothetically, that you have a hotel chain and think about starting up a casino. Your hotel chain has already generated 8 million dollars this year. Your casino cost 8 million dollars to build. You have a taxable income at this moment of zero. Or if, you know, you have generated 8 million dollars in income but lose 18 million dollars in someone else’s casino because you’re a prolific gambler, then your losses currently sit at negative 10 million.
When you’re a person you report your income to the government and they tax you first, then you spend what’s left on rent, food, electricity, etc. When you’re a business you subtract all your expenses first then you report your income and you’re taxed last. You could have a business generating one million dollars but your expenses are slightly higher, that’s a loss.
However, the business is still around, it’s still making money, it’s still renting an office, paying salaries, etc. You’re an employee at your business, you get paid, too, and you get to subtract that amount from you business income. You’re then taxed on it as person, but it was a loss for your business.
You could grow your business every year and spend more to grow your business every year, and if you don’t have a lot of excess money when you’ve paid everything, you’re losing money or breaking even. Even though you personally have a great income, a big house, a new car, etc., your business is spending its profits to increase itself and that’s a tax loss even though it’s worth more every year. You decide to build a new warehouse, you get to write off this expense over several years. Now your business is worth more and making more, but because you have to pay off the warehouse, that’s a small loss.
The key is that business pays all of its expenses, lowering their value, then they’re taxed only on what’s left, while you’re taxed immediately on everything, then you pay all your expenses.
You buy two houses for 100 thousand dollars each. One appreciates in value to be worth a million, the other has a sewage plant open next to it and becomes worthless.
You are a millionaire because of the first house, but the government isn’t going to tax you on the change in value because you haven’t sold it yet. Let’s say you decide to sell yhe second house for a penny. You still have a net worth of a million, but your income for the year is -100k.
This happens many places, but the most visible is the stock market
Rich people don’t actually use their own money for anything they borrow from the bank against their assets at insanely low interest, and then sell off assets to pay off their loans when they come due. When the assets are worth less than their buy in value, they report it as a loss and the difference is a tax deduction.
This is simplified and theres a lot of extra math and rules- but to put it in real terms. Say you own your house outright, you want to buy a second one for $300k and redevelop it into a two family as a rental investment. You go to the bank for the money to buy and improve the new property and use your house as collateral saying it’s worth a million if you were to sell today. They give you the million @2%. You finish the property and while you’re in the process of selling your note comes due and now the bank wants their million back so you have to sell your primary. You’re only able to get $700k because that’s really all it’s worth. You report a loss of $300k. You still own the rental so you bring in a partner to buy in at $300k and give the Bank their million.
Someone that rich with competent accountants will probably be able to re-order all their affairs so that they didn’t, legally speaking, make any *money*. They have more wealth than they did at the start of the tax period, probably, unless they are bright orange and lie to their tailor, but legally speaking it was all given to them by other people or accrued by the natural action of the market. Actual growth of wealth among these people is largely in capital gains, which are only taxed when realised: so they are released by taking loans against an assessed value that nobody intends to actually genuinely turn into actual money. Because that would create a huge tax liability nobody wants.
Why is this legal?
Basically because the political system hugely advantages politicians who have mega-rich friends, so politicians spend a lot of time and effort making it legal.
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