I understand the concept, that people does it for tax advantages and I would understand the concept for a period of maybe up to 3-5 years but not for 10 years + while assets are growing tremendously.
The answer “tax fraud” is a little bit to easy because it doesn’t pop up the whole time.
I didn’t found the answer on the first google page but I’m also happy with an simple url 🙂
Thx for your time
In: Economics
Its often possible (especially if you’ve got good accountants) to find ways to count lots of living expenses as “business expenses”. If you work for someone else, you get your salary, pay tax, and buy a car with the leftover. If you own a business, you can probably have the business buy the car, and show that much less “profit” but you still have the new car.
Also, you can reinvest most of your profit back into the business, which means its no longer treated as profit, but as the owner of the business your net worth has increased.
Profit is not the same as cash flow.
If I have positive cash flow (more money in than out) I have “made money” in the sense that I’ve got cash leftover to spend. I can buy food, buy a boat, go on vacation, etc. If you maintain positive cash flow forever, life is good.
But cash flows are a lousy measure of how a business is doing, especially over shorter time periods. The whole point of accounting is to line up revenues with their “matching” expenses to more accurately reflect how health the business is. So, for example, if I buy $1 million in supplies this year to help me build widgets I will sell for $5 million next year I’m running a pretty health business but I’ll show negative $1 million cash flow this year (bad) and positive $5 million next year (yay!). Profit is supposed to account for all that but it means it can get out of sync with cash flows.
It’s not done with a regular job. Real estate investing is probably the closest one can get without committing fraud. Say you own 10 apartments worth $1m. You put down $200k and have mortgages for $800k. You live in one apartment, collect rent on the other 9 at $1000/mo. Your mortgages (PITI) total about $6000/mo. You lease a large SUV “company car” to check on your properties, haul materials, etc. for $1000, including gas, insurance. You can deduct for depreciation on your properties on your taxes. You have a place to live, a nice car, $2000/mo. for food/social life but probably show small enough actual income to pay no taxes.
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