{"id":18570,"date":"2016-01-08T15:58:58","date_gmt":"2016-01-08T20:58:58","guid":{"rendered":"https:\/\/www.saratoga.com\/saratogabusinessjournal\/2016\/01\/business-report-darwinism-and-business-taxes.html"},"modified":"2017-11-08T13:46:30","modified_gmt":"2017-11-08T18:46:30","slug":"business-report-darwinism-and-business-taxes","status":"publish","type":"post","link":"https:\/\/www.saratoga.com\/saratogabusinessjournal\/2016\/01\/business-report-darwinism-and-business-taxes\/","title":{"rendered":"Business Report: Darwinism And Business Taxes"},"content":{"rendered":"
\n
\"saxbst\n<\/div>\n
James W. Cole is a tax partner with SaxBST, an accounting, tax and financial services firm.\n<\/div>\n<\/div>\n

BY JAMES W. COLE, CPA<\/p>\n

According to Wikipedia, Darwinism is the
\ntheory of biological evolution stating that all
\nspecies arise and develop through the natural
\nselection of small inherited variations that
\nincrease the organism’s ability to compete,
\nsurvive and reproduce. In nature this plays
\nout over long periods, often with small incremental
\nchanges.<\/p>\n

In today’s business and tax world, these
\nchanges happen rapidly and “natural selection”
\nis driven by innovation, global competition,
\nthe political process and, ideally, by
\nwell-informed conscious choice rather than
\ntransmutation.<\/p>\n

Most businesses today are no longer bound
\nby small geographical constraints. You can
\ninvent the better mousetrap in your garage
\ntoday and be selling it across the country and
\npossibly the world next month thanks to the
\ninternet and global shipping. And it is even
\neasier for many IT based businesses that can
\navoid shipping altogether. This provides both
\nopportunity for success, as well as competitive
\nrisk to be beaten by someone, somewhere who
\ncan build it faster and\/or cheaper.<\/p>\n

So how does all of this “evolution” play out
\nin the business tax world?<\/p>\n


\nIt starts with how a business is structured
\nfor tax purposes. Most businesses operate
\neither as a taxable C corporation, an S corporation,
\nor as a limited liability company (LLC).
\nThe latter two entities are often referred to
\nas “flow-through” entities meaning the company
\ndoes not pay income taxes but rather
\nthe owner(s) pays the tax individually. In
\nfiscal 2014 just over 2.2 million C corporate
\nreturns were filed, whereas over 8.4 million
\nflow-through entities’ returns were filed (split
\nbetween S corporations and partnerships).<\/p>\n

Thus it appears that natural selection has
\nfavored the flow through entities in large part
\nto avoid the potential “double taxation” that
\ncan exist with taxable corporations (1st level)
\nand on the taxable distributions to the shareholders
\n(2nd level). However, the conclusion is
\nmuch more nuanced and the decision should
\nbe reached after evaluating all options and
\nvarious scenarios. In fact many businesses operate
\nwith a combination of entities designed
\nfor legal protection and tax minimization.<\/p>\n

Then while operating the business, the
\nowner is faced with a myriad of decisions most
\nof which have tax implication; capital investments,
\nfinancing, compensation, retirement
\nplans and other benefits just to name a few.<\/p>\n

And because the tax consequences can
\nbe so high (at times at a total rate in excess
\nof 50 percent), the decisions can be unduly
\ninfluenced by the expected tax impact. (For
\nexample – buying new equipment to grab
\n“bonus” depreciation when the owner would
\nhave otherwise deferred the purchase.)<\/p>\n

While the business owner is sorting through
\ntheir own selection tree for their growth
\nand “survival”, governments are doing the
\nsame albeit on the other side of the ledger.
\nAt the Federal level, serious debate over the
\ncorporate tax rates is undertaken in part as a
\nresponse to the issue of corporate inversions
\n(a U.S. multi-national company merging with
\na foreign company to avoid U.S. tax on oversea
\nearnings – often generated in part through
\ndevelopment and technology in the United
\nStates). The U.S. will be forced to compete in
\nthe global market as more and more barriers
\ncome down for businesses to structure their
\noperations. Unfortunately broad based tax
\nreform is a prisoner of the political process.<\/p>\n

New York state has also had to respond to
\ncompetition over the years – primarily with
\nother states. Historically known for its heavy
\ntax load, the state has made various moves to
\nencourage business to stay (or move) here.
\nThis includes lowering the corporate tax
\nrate to 0 percent for qualified manufacturing
\ncompanies, switching to a single sales factor
\nfor apportioning income to the state (which
\nbenefits companies located here and selling
\nelsewhere), and adopting the controversial
\n“economic nexus” standard to attempt to collect
\ntaxes from businesses located outside of
\nNew York and selling to New York customers.<\/p>\n

The state has made the economic determination
\nthat it is better to have businesses
\nlocated within the state generating income
\ntaxes through its employees rather than taxing
\nthe business entity heavily. In addition to
\nthe income tax shift, keeping businesses here
\ndrives property and sales taxes as well as the
\ncompounding economic benefit of employees
\nspending their wages locally. How this plays
\nout over time will be vital to the health of the
\nstate and will continue to require adjustments.<\/p>\n

Comprehensive tax reform (call it evolution)
\nis needed for the benefit of the society
\nas a whole. In the past 75 years the U.S. government
\nhas shown a surplus 12 times. Restated
\nas a won-loss record we would be 12-63 (with
\nno wins since 2001) and clearly looking for a
\nnew approach.<\/p>\n

Where the theory of evolution breaks down
\nin the tax world is the insertion of conscious
\nchoice that can supersede natural selection.
\nLeft to their own inclinations, business owners
\ngenerally want to pay as little tax as possible
\nwhile governments try to appease various interest
\ngroups – favoring some over others. The
\ncombination can be unhealthy and requires a
\ndifferent approach and more than a few individuals
\nwith a longer and broader perspective.<\/p>\n

Cole is a tax partner with SaxBST, an accounting,
\ntax, and financial services consulting
\nfirm.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

James W. Cole is a tax partner with SaxBST, an accounting, tax and financial services firm. BY JAMES W. 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