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Note that we’re talking about two companies exchanging services.

When two companies undervalue the services that they offer to each other, they pay lower taxes. This is the illegal part.

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If the expense is tax deductable, it mostly doesn't matter whether you have $10 earnings vs $10 business expenses or $10K.

Good luck explaining that to the IRS.

The IRS would be fine worth it if taxable income is unchanged.

Businesses are taxed on their net income, not get gross.

You mean they are fine with the things they won’t notice? Perhaps that is true.

No, depending on your accounting method the transaction we're discussing may be disregarded, so the net economic position of the taxpayers is no different. As a result the IRS is generally indifferent...so long as you maintain that method of accounting for future similar transactions.

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