Ever hear of the expression - You have to have money to make money?  You have to have money to invest before it becomes an expense.  If the money is taxed away - no invest - no expense.

And if you get your timing right, you invest the money - get an expense - no tax.

In other words rather than getting all of your post-tax profits for this year, and waiting until the start of the next year to invest them (meaning you then pay all the tax on those profits and likely have to wait a year to get your expenses offset aganist taxable profits) you instead incur those expenses in the current tax year.

Since the 1 year is effectively an arbitrary time scale for the purposes of accounting+taxation, in reality it would mean you'd take the money you make throughout the year, use it to hire more staff throughout the year, and then at the end of the year when the actual taxes are calculated, they will take into account the investment of your profits throughout the year as an expense, and not tax you on them.

That does not work when it is taxes.  Did you know that even filing Bankruptcy does not eliminate a tax burden?  There is no way to "expense" before taxes.  You make a profit, the first thing that comes out (before food shelter or clothing) is taxes.

Counting your chickens before they hatch?  Might want to tell that to Circuit City, Heilig Meyers, Best Products, Service merchandise, S&K, etc.  But you will have a hard time doing that - since all are bankrupt (gone or going).

Sounds problematic to me, playing with the numbers to avoid paying taxes.

Isn't that illegal?

Um, it's quite simple:

Month 1: Make $100k revenue, $50k costs, put $50k surpluss cash into hiring staff (who will yield you say $1,000k in 2 years time).

Month 2: Make $100k revenue, $50k costs, and the $50k surpluss being invested into the staff hired in month 1,

etc.

Taxable year end: Company has $1,200k revenue, $1,200k costs, 20% tax = 0 tax., 40% tax = 0 tax

Alternative: Money is distributed to shareholders (or in the case of a private company is taken as drawings/salary by the owner to fund consumption):
Month 1: Make $100k revenue, $50k costs, 'withdraw' $50k.

Month 2: As above

Tax year end: Company has $1,200k revenue, $600k costs, 20% tax = $120k tax due from the company (or the individual if a private company), 40% = $240k due.

Scenario 1: Invest and you get your investment as an expense, and reduce your taxable profits, and hence the tax you pay. Scenario 2: Don't invest in the company, don't get your money as an expense, hence pay tax on it all.

(payment on accounts etc. for tax ignored for simplicity, although they wouldn't change the end result overall)

Tax avoidance is typically legal, evasion illegal (although different approaches are taken by different authorities). So for example making use of a tax allowance to delay or avoid paying tax would be legal, but falsely saying your profits are lower than they actually are would be illegal. Similarly authorities typically take a poor view of artificial tax avoidance schemes designed to clearly exploit loopholes in the law and will often get these held as illegal.

To give you a quick example, lets say that companies have an annual allowance for capital gains of $10k - the first $10k made will be tax free, the rest will be taxable. Now lets say you have 2 items you bought for $40k, and expect to sell for $50k, and that you're coming up to the end of the taxable year and want to sell them soon (and also don't expect to be selling items realising a gain of ~$10k or more in the next year). Rather than sell them both in this tax year you'd be better off selling one now, and waiting a couple of days to sell the other. The result is instead of being taxed on a $10k gain in this year and $0k the next year you're taxed on $0k this year and $0k next year. You've not done anything illegal, you've simply planned your affairs to take into account the tax implications.

There are many taxes you pay in business that are there no matter what.  For instance the tax you pay on the workers' pay check.  How bout the taxes you spend on items that are used?  I buy paper for paperwork and low and behold... sales TAX.  How would you get out of paying either one of these?

Only if you have a steady and predictable stream of money coming in.  As I said, counting chickens before they are hatched.   And truth be told almost no company figures bottom line on a month to month basis, but on an annual one because some costs cannot be broken down my month, only by year (and that is dictated by law, not by company policy).

So, no again, it does not work.  YOu report a profit at year end, not each month,  and that is what is either taxed or invested.

To clarify, I'm talking about taxes on profits (corporation taxes for a co, although it'd be income tax if it's run/owned by an individual). So the cost of labour will be the nominal cost of their pay check plus the taxes paid by the company for them as well - to the company, the cost is the combined amount of the two.

No, counting them as they've hatched rather than letting them hatch, and then almost a year later counting them . I'm also amused to hear you question a steady and predictable stream of money coming in - it's much more realistic than assuming you get 0 money until the end of month 12 where you suddenly get a ton of money, and it can produce the same result if you adopted the slightly more realistic assumption for a game company of having say 2 games released in the year, 6 months apart, each producing a high amount of sales initially which then die off (but obviously it's far simpler to make it easier to understand).

No, there is no law saying that a company can't break down costs month by month and determine how much profit it has made in particular months. Since a company will need to have a good eye on it's cash flow to make sure it doesn't suddenly go out of business even when possible, and will need accounting systems in place to produce it's annual accounts (if it is required to do so - not all businesses are), it isn't exactly much of a streatch to see that they would be able to tell how on track they are with their revenue and costs. In fact it would be a poor company that ignored it's performance each month and waited until 12 months to see that actually they were loss making from month 2 and really should have done something about it. A bit like closing the stable door after the horse has bolted. In fact it is the law that you do precisely such a thing for your accounts - if you pay for your electricity for 1 year with 3 months left in your accounting period, it'd be wrong to count all 12 months paid as an expense - instead 3 months will be an expense, and 9 months a prepayment (counted as an asset, and hence meaning you only end up having 3 months offset against your taxes).

You still don't seem to be grasping that businesses aren't working in some sort of vacuum and only making decisions once a year based on this. If a company makes a ton of money in month 1, what is it going to do with that? It has lots of spare cash lying around, and you seem to be saying they should ignore it, leave it in a presumably low interest account, and wait until the end of the year for it to be taxed and then and only then decide to use it. More likely is they will decide when they have that money what to do with it - do they invest it in the business, or do they withdraw it from the company? (and to help decide what to do they'd want to work out how much of that money is 'profit', i.e. what liabilities they will still have to pay that they will need some of the cash for).

So, if they invest that money back into the business by hiring more staff, guess what? It's now an expense, and won't be taxed at the end of that year. If instead it's taken as drawings, it will be taxed.

It takes a year to hatch them, yet you are spending the money each month as if they were already hatched.

There is no law that says they cannot "ESTIMATE", but there is a law against determining profit and loss on a monthly basis.  At least in this country it is called the IRS code.

No, you are not grasping the difference between cash flow and profit.  Profit is dictated by law - and is calculated on an annual basis.  Cash flow is dictated by Accounting standards and is calculated on a daily (or weekly or monthly) basis.

I'm starting to wonder if you're being deliberately obtuse here - you make money before the tax year end, invest (some or all of) it into the company by hiring staff to undertake a project, and hence don't get taxed on that money when it comes to the year end, as opposed to waiting until the year end, being taxed on the money, and then start thinking about what you want to do with the money you've been sitting on for ages - what is it you're disagreeing with or not understanding about the 'invest->teated as expense->less tax paid for the year' step? Also profit is a purely accounting measure, so for you to say that I don't understand the difference between profit+cash flow, and then point to cash flow as being the one determined by accounting standards is pretty hilarious! It also suggests a possible lack of understanding that there is more than one kind of profit as well - the profit reported in a company's profit and loss account (determined by the relevant accounting standards) is not the same as the profit a company is taxed on, for example.

Anyway my last example to illustrate it (since I dont want to spend any more time on a fairly small issue):

2 companies, A and B: Initially are identical; Undertake 12 projects each month, each requiring $10k a month to run (all of which is allowable as an expense for tax purposes), and each expecting to provide a 1-off revenue of $200k after 12 months (and as I mentioned before if you want to be more realistic then reduce the no. of projects and have the revenue peak and then drop off from each one). It starts off with 1 super-project ending, yielding a hefty amount of revenue over the first 12 months, before stopping (basically so it has money to invest and won't have carried forward losses in year 2 to keep things simpler).

Month 1: Undertake 1st project, cost $10k, revenue $xk

Month 2: Undertake 2nd project, costs $20k, revenue $yk,

.

.

.

Month 12: Undertake 12th project, costs now $120k, revenue $zk. Co's taxable profits work out to be 0 for this year (again if you want you could always increase this hypothetical figure if it makes you happier)

Year 2:

Month 1: Undertake 13th project, Costs $120k, revenue $200k

Co has $80k of cash (n/t: That's your cash flow, if you're still not sure). Company can either decide to invest this in hiring staff to undertake additional projects the next month, or it can hand it out to the owners (or it could invest in some other way that might not be fully allowable as an expense, etc.).

Company A decides to invest this money, and undertakes 8 extra projects next month. Company B decides to hand it over to the owner(s).

Month 2: A: Costs $200k, revenue $200k; B: Costs $120k, revenue $200k

.

.

Month 12: A: Costs $200k, revenue $200k; B: Costs $120k, revenue $200k.

Taxable profit for the year:

A: $80k B: $960k

A would have also made $960, but they chose to reinvest the money they made back into the business, meaning they could count it as an expense, meaning they're only taxed on $80k, as opposed to $960k.

If you don't like the idea of A counting on receiving revenue from future projects, then have them only undertake 1 extra project in month 3, (and then only undertake future projects when they've made $120k from current ones that have ended), so that they're 'counting their projects as they hatch'. This would still result in a lower taxable profit for the year than B, because the investment in any projects made would be an expense and hence tax deductable. Similarly if you want to complicate things (to make them more realistic) by say introducing borrowing, inflation, effective rates of return for the level of risk, limited number of projects which also feature diminishing returns to scale etc. you can, but there's little point if you don't understand the underlying point.

How about you showing us the tax code you are using?  Its certainly not the American one.  Maybe its possible for you to do it, were as we can not.

No, but I beleive you are.  Clearly you dont understand busines 101.  Until you do, you can pipe dream, but real business men will merely smile and nod at the naivete' and out right wrong understanding you have of business.

Thats putting it nicely.  I have brought up some of the ideas that have been floated in this thread during tax conversations with business owners I know. Several of their responses were quite crude.

Any tax code which allows money spent on employees to count as an expense for tax purposes (which would likely be pretty well every capitalist country). Are you really saying that the US (or any other similar country) taxes a company's revenue, rather than it's profit?! (i.e. that costs like staff wages aren't allowable). While there are differences between countries on what they deem taxable profits to be, this isn't (to my knowledge) one of them. In fact I'd be interested if you could point to a tax code from any country that does tax just revenue/doesn't allow the cost of hiring staff as an expense.

So after I again ask you to point to what part you don't agree with or understand, you yet again fail to, and just say I don't undertand business? What a convincing response...