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Fully Taxated, Part 4
In the second part, we started with a brief dismissal of the UCC gambit. We then discussed the example of Andy and Bob. Andy earns $30,000 per year, but walks away from the tax table with a total of $33,337. On the other hand, Bob earns $100,000 a year, but walks away from the tax table with a total of $84,281. Bob makes more, but Andy keeps all of what he makes, and then some. We also discussed quality of life issues for both, and the likely tradeoffs for each.
In the third part, we introduced Chuck the contractor, whose C-corporation ChuckInc bills about the same that Bob receives as a salaried employee. We saw how this distinction makes a dramatic improvement in Chuck's quality of life. The primary cause of this improvement is that, in the extreme, Chuck gets to keep the taxes which he would otherwise pay as Bob the employee, as well as gaining the potential for scooping up some of the same Uncle Sugar gravy to which Andy is entitled. We also noted that the Al-The-Welder-Plus-Alicia-The-Wicked-Hot-Hairstylist combo pack, whose combined income resembles Bob's, can also participate in the fun.
I have to again give a disclaimer. What I am about to describe to you is legal to the best of my knowledge and understanding. However, I am not a tax or law professional and you shouldn't take anything out of this article other than pure entertainment. I must also repeat an essential point from the first article in this series: To thrive in any system, you must first recognize the reality of that system, and then act accordingly in order to manipulate its energy to your own purpose. To thrive in this system and not be perpetually frustrated, or worse, you must accept the premise that our system is not fundamentally noble, but was specifically designed to feed a class of certain very wealthy people. Refuse to accept this fact, and I can't help you.
In this part, we'll discuss some of the details which confound or escape the unwary tax slave. There is much more to learn, but my goal here is to tease some of the more subtle aspects of the tax code from hiding.
For those of you delighted by my normal vitriol, this part, like the previous, will seem a little dry. It is difficult to stir men's souls, for good or ill, with deductions and depreciation, income and expenses. But, in our pre-collapse state it is necessary to understand these things in order to thrive, or even stay afloat, even though these concepts will have no context soon enough, nor should they. Our purpose here then is twofold: to hasten the collapse as well as husband our current resources more effectively so that we are better prepared when that inevitable day arrives. Tend this information with as much loving care as you tend your physical provisions, and you'll find yourself sitting on more beans and bullets when you need them.
So, let's jump right in. Again, counter me with substantive assertions. Quibbles about the nuances are easily swatted aside in that I must, of necessity, keep things simplified and concise.
First, let's discuss the need for full incorporation a little more. When I say full incorporation, what I mean is forming a C-corporation, versus the seemingly more simple administration required of an S-corporation. The distinction between these two is only in the eye of the federal reserve collection service known as the IRS; the amount of effort required to create a corporation of any kind is dependent on your state, and these usually make no distinction.
To the IRS, the distinction is that an S-corporation reports its dealings as additional schedules filed with the individual 1040s of all shareholders, while a C-corporation files completely separate tax returns. This is an essential point: you will collect the same information in either case, but the IRS, and potential jurists, will see totally separate sets of data between you and your company. Filing as a C-corporation will establish you as a noble and worthy trustee of The Realm, while filing as an S-corporation gives you the image, rightly, of a wannabe trying to "get away with it." Filing your 1040 as WannabeChuck having $100,000 in gross income, but with $70,000 in immediately suspect deductions, paints one picture. Filing as poor old broken-down SlaveChuck, who only got $30,000 after that mean old ChuckInc took $70,000 of his labor, paints another. Get the picture? Now imagine which picture you want to paint to a dozen slack-jawed drool-caked public-school-educated jurists.
LLCs, partnerships, sole proprietorships (and other variants of these depending on your administrative jurisdiction we laughingly call states), suffer the same defect. Others imagine that individuals are entitled to the same deductions as small corporations. Yet, attempting to do so is not only a flag for an audit, it is also a flag that you are clinging to the fantasy that our system is fundamentally noble and just, if a bit temporarily misguided. As an individual subject of The Realm, you are considered as nothing more than someone's employee, not a business. As a subject (slave or serf, take your pick) of The Realm, deductions for your maintenance are the rightful property of your titleholder (employer), not you.
Creating a corporation is easier and cheaper than ever before. In the past, one went to an attorney, plunked down $500 or so, and they then gave you a book of all your essential papers, including the S-corporation election they often automatically filed with the IRS without even asking you. Now, in the Internet age, all one needs to do is visit the corporations section of your state's department of state website. I offer some tips on this here. I'll add to those tips as questions roll in or as the landscape changes. The entire process can usually be done online, the bulk in a single evening. Most states have made it easy, particularly because they want you to cough up the cash they desperately need right now (but thanks to these articles, more of which they won't be getting from you).
Now, every two weeks, each month, each quarter and each year you will have to file certain tax forms to prove that you are a slave-owner rather than a slave trying to squeak by. To successfully navigate these administrative waters, the first thing you need to understand is the most important tool of a taxater: the spreadsheet. In fact, the first ever personal computer spreadsheet, something called VisiCalc, was invented specifically for organizing financial information, including taxes.
If you've read Starving the Monkeys, you know how important it is to understand math, science and technology, in addition to the physical skills such as marksmanship. If you are not a technology buff, but want to taxate yourself, you will at least need to understand how to use spreadsheets. This does not mean, however, that you need to plunk down big bucks for a shrink-wrapped Microsoft Office. These days, spreadsheets are free as part of the Google Documents feature, but I wouldn't use that. Instead, check out OpenOffice, which is a free open-source business documents package that works on both PCs and Macs.
You have to be absolutely meticulous in your record-keeping. There are too many checks and balances built into the tax system to even think about cheating. I've also said that if it hits a bank, including a check from someone else's account, it happened, so don't even think about pretending that it didn't. The truth of that statement is revealed by understanding what "bonds backed by the full faith and credit of the United States" means. If you don't understand, read "Bonds? What Bonds?", and then convince yourself that the largest bond holders, and consequently sinks for your tax dollars, are (drum roll) institutional investors such as banks. Why some people continue to think that those who own this country would help you hide, or not actively reveal, potentially taxable income is beyond me.
More fun is to leave a few Easter Eggs in place in the form of "overlooked" deductions you might have taken had you noticed at the time. If I ever get audited as a means of shutting me up, I'm walking away with a check, or else those monkey attorneys and judges will have to explain why the monkey tax rules don't matter to those monkey juries. I've been audited before, and each time I got paid. Not much, but enough to make it too risky for their numbers to try again. They say they don't work on a collections quota, but my experience says otherwise.
Trust me, helping to destroy monkeydom like this is way too damned much fun.
Anywho, to catch the cheats or the simply unwary, all of those forms filed with various entities are cross-linked in such a way as to require consistency everywhere, and to flag for audit when they are not consistent. The flip side of all this is that honest math errors are indistinguishable from attempting to cheat on your taxes (read as "attempting to withhold banker gravy").
The flip flip side of all this is that it doesn't matter so much what the numbers are, but that these are everywhere consistent. Read that last sentence out loud three times and consider deeply the implications therein.
You must learn to use a spreadsheet well. A good choice is OpenOffice, which is a free, open-source package that includes spreadsheet, word-processor, presentation, database, and drawing tools.
In my case, on top of the basic office tools, I have world-class business software written by the only person I trust to do this. I can tell you at a moment's notice who owes me what and for how long, what I've sold and when, what I've bought and when, where every papered penny is, and can retrace every step in my financial history since I learned to walk this walk. I have the financial and taxational equivalent of an airliner's autopilot, and can fly this machine at night in a blinding economic snowstorm and not miss a single runway. It slices, it dices, it tells me what to put where on every form. Good luck finding anything amiss, because there isn't anything amiss. The data says so.
Fortunately, you don't need this level of sophistication, nor do you need off-the-shelf business software packages which charge you to not do what you really need it to do. Just as a simple scoped bolt-action hunting rifle, in the right hands and at the right time and place, can drill through the most sophisticated defenses, in the right hands a simple spreadsheet will do the trick.
The first step is to mirror each and every bank transaction on your spreadsheet. Maintain a separate spreadsheet for each bank account your company has, and for each credit card account your company has. Each line of your spreadsheet contains the date, an optional reference number (such as a check number), a payor/payee column, an expense column, an income column, a net balance column and a remarks column. When you reimburse for personal expenses, such as the personal check you wrote to pay your business license fee before your company had checks, you will have a separate spreadsheet for these items. And, you will maintain another set of spreadsheets, consistent with all the others, which contain all the elements of your payroll and employer taxes.
At the end of each day, or certainly no longer than once a week, make sure that all your expenses and receipts have been caught up in your spreadsheets. Do not let this get behind. You do not want to be sitting in a pile of receipts at year's (or month's or quarter's) end. Instead, you want to spend an afternoon sorting data and laughing while filling out forms. Eventually you'll understand the flow and know what you are doing, but it will take some brain pain to start (as all worthwhile things do). I'll post some examples on Starving the Monkeys at some point to get you started, but in the meantime you can get the incorporation ball rolling.
Your biggest challenge is likely to be payroll. Now, you can hire payroll service monkeys to do this for you, but that kind of misses the point of being in control of the data. And if they make a mistake, you are still liable, not them. Each payroll event will be a hassle to start, but you can limit the pain by paying yourself only once per month, or better, once per quarter.
Each payroll event will involve the following elements. First is your gross pay, or the pre-tax amount. Try to keep this amount consistent from month to month or quarter to quarter, as you can then just reuse all the amounts from the last time. Next, you have to subtract the federal reserve withholding, social security tax, medicare tax and state income tax withholding. The net of all this is the check you write to yourself. Also, your company has to set aside four additional amounts: a matching social security tax amount, a matching medicare tax amount and a pair of state and federal reserve unemployment taxes. The percentages for all these are well-documented and available online from the respective agencies.
Once a month (or a quarter or every two weeks in periods in which you pay yourself, as directed), you will then have to divvy up all these withholdings and write checks in the appropriate amounts to the indicated tax collectors, as well as fill out forms accordingly. And then update your checking account spreadsheet with this information. It is at this step that most small businesses get into big trouble; they simply lose track of all the numbers. Yet some simple note-taking and spreadsheet preparation can save all the headache, so that your forms simply contain numbers from your spreadsheet, or sums at the bottoms of the rows. Also get a calendar and mark important tax events on it; these are also well-documented.
The federal reserve collectors have taken to requiring online filing for their cuts, which is actually a step forward. This system is called EFTPS, for Electronic Federal Tax Payment System. You'll create a login using your corporate EIN and then use that forever. You'll also create a login for similar payments to the federal reserve branch known as social security. This latter login is also what you'll use to easily generate W-2s at year's end. It's getting easier and easier to own slaves in some ways.
Now let's discuss some basic terms you need to understand. The first of these is depreciation. When you buy some piece of equipment (or a building or a truck or so on) to use in your business, it rots on the hoof from year to year. This ongoing rot is called depreciation, and can be deducted as a business expense. The rate of rot is determined based on the class of the item in question, and the depreciation tables are well-documented in the tax instructions. There is also a special kind of all-at-once rot known as a Section 179 expense. When companies talk about "expensing" a piece of equipment, this is what they mean, rotting its value away all at once.
The paper rotting starts on the day you buy the thing, and continues until you sell it. If you buy a truck for $10,000, and it has depreciated by $4,000, you have been able to deduct that $4,000 as an expense from your income. Now, if you sell the truck for $9,000, you have to pay back some of the deducted rot as a capital gain. The "cost-basis" for the truck is $10,000 - $4,000 = $6,000. Since you sold it for $9,000, you have a capital gain of $3,000, even though you actually lost $1,000. This technique, by the way, helps you steer expenses into high income years, and steer gains into low-income years.
We'll get back to this in a moment. Now recall that passive income is king. The Ruling Classes don't work for a living, they broker the efforts of those who do work. As a result, the tax code rewards passive income; for one thing it isn't subject to social security and medicare taxes, which adds up to over fifteen percent overall once the employer's side is paid. One form of passive income is interest, another form is rent or leases. Sitting on a big capital loss from your house that will take a lifetime (or more) to chew away at $3,000 a year? Then you'll love this next part.
When you created your corporation, you also created a customer for your personal leasing business. One possibility is to buy some thing that your business needs, then lease it to the company at whatever reasonable rate you decide. You get to deduct the annual depreciation from your rotting thing right off of your lease income, which, as passive income, is free of social security and medicare taxes in the first place. Die, pension monkey, die. Then, when you sell that thing, you have to report the capital gain (as in the truck example above), but that capital gain is more than offset by that big paper loss you're already sitting on. Die, tax monkey, die.
Same useful thing. Same net money moving from the company into your pocket. But no taxes whatsoever. All because you structured it right as passive income, and had your corporation to help. Yet, you still qualify for the Andy gravy to boot. Thank you, Uncle Sugar, see you next year. Of course, you still took the loss on that house, but it stings a lot less now, doesn't it? Die, bank monkey, die. So get out of that subdivision before it all goes to hell. And die, HOA micro-tyrant, die.
I'll post more tips as we go at Starving the Monkeys. There's just too much good stuff to cram into even a long article series. But there's time for one last important detail. Since BigCo enjoys its slaves, why would it want to pay ChuckInc instead? In other words, how can you get your boss to pay your company instead of you? That is really the essential nugget, of course.
The first step is to be world-class hot at what you do. See Starving the Monkeys for the mindset this requires. It may not be possible to be the best welder in the world, but you can be the best welder anyone in your world knows. Or you can create the most wicked-hot hair in town, or whatever. If you aren't the best at what you do, fix that first, or find something else to do at which you can be the best.
Armed with that status, and knowledge of the suit monkey mind, you are ready to make the sale. If there is anything that the suit monkey loves more than adoring slaves who cater to his whim, it is getting someone really good to work cheap. So consider Bob's employer-side costs.
Bob makes $100,000, but it costs BigCo an additional nearly $8000 in employer social security and medicare contributions (which ChuckInc also has to pay if it paid SlaveChuck $100,000, which it won't). Add to that a raft of practically useless benefits, including vacation time, etc., and the employer contribution can be in the 30% to 40% range. Bob actually costs the company about $130,000 to $140,000, and firing him can take a lot of work if he goes sour just before losing all of his gruntle. ChuckInc can split the difference and provide a smiling SlaveChuck for $120,000. ChuckInc then pays for low-cost high-deductible health insurance with the remainder, along with the employer's portion of social security and medicare taxes on the smaller amount which does trickle through. And if SlaveChuck does get sick, fortunately he works for a company that provides full reimbursement coverage (pre-tax of course) for out-of-pocket expenses.
Even if your boss isn't a suit monkey, but rather an actual human being, that math is still appealing. And, he can boot you at a whim, but won't want to because you are world-class hot, remember? Plus, for a small business, there is another bonus. Remember all that payroll math? Small businesses love the idea of just writing a check for something. Posed the right way, an invoice for hours worked is a lot simpler and easier to manage than all the tiddly bits required by having an employee.
And this is the key reason why you need a C-corporation. As an individual, you can't readily perform work without being an employee because of something known as a 1099 (pronounced "ten ninety-nine" if you want to sound in-the-know). If you try to work as an individual contractor, you are classified as a 1099 contractor, which means that your boss is on the hook for all of your payroll taxes if you fail to file your share as self-employment income (even if you later pay them). The risk is just too great; most businesses won't even consider contracting an individual as a result.
Having your own corporation completely shields your customers from this 1099 risk. Make sure you use the magic phrase, "This isn't a 1099 situation. I'm an employee of ChuckInc, which is a
I wish I had more room, but we're way over as it is. Just make sure you understand all the rules, and follow each of them. Then figure out how, like a judo master, to redirect all that energy in directions you want it to go.
Don't be afraid to take the plunge. Once you start working this way, you'll begin to see opportunities for destruction everywhere. Everything you want is a potential business expense, everyone you want to see is a prospect, every event with like minds is a prospecting opportunity, and every source of oppressing energy can be harnessed to destroy our enemies.
Along the way you'll encounter many monkeys, fearful of your role in their looming destruction but unable to articulate it, who start each sentence with "He's just trying to sell ..." Of course you are. Because you can, and because it benefits you as both a slave and a slave trader. These monkeys created this system to enslave us; let's grind it, and them, into oblivion together.
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