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Comment by dragonwriter | Hacker News Reader

> If a company can reinvest their excess income in new ventures that will drive growth that will increase revenues and thus the stock price. That is a much better use of capital then generating a profit

If a company has excess income to reinvest, that is profit. You can't reinvest profits if you don't have profits to reinvest.

> That is a much better use of capital then generating a profit

No, actually, its a use of profit (perhaps one that converts it into capital.) And, obviously, you have to generate profit before you can use it for anything.

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You don't understand how corporate accounting works.

I don't understand either. How can reinvesting corporate revenue avoid taxation? Isn't corporate income taxed regardless of whether it's put into the bank or reinvested into new ventures?

If you reinvest your profits into your own business that money usually gets charged as a expense on the income statement so your reported gross profit reduces by that amount and thus, you don't pay taxes on that amount.

For example, lets say Company XYZ anticipates making $100M in gross profits but decides to invest $100M in R&D for a new product. Their reported gross profit would be $0M for the year due to the $100M charge.

Is there anything analogous for personal income? That is, can I invest my income in such a way that my gross income is $0 for the year? I know mortgages are deductible, as well certain retirement savings accounts, but what about daily living expenses? It seems a tad unfair that corporations can effectively evade taxation while individuals cannot. Or is that by design because corporate spending trickles down to individuals' salaries?

Generally, no. The key difference between personal and corporate tax in most countries is that personal tax is conceptually taxed first, after which you can spend what's left. But a corporation gets to spend first, after which taxes are levied on whatever remains.

Unlike you or I, if a company makes no profits, it pays no tax on its income.

The basic reason is because income is seen as distinct from profit. If personal income taxes were based on a profit-like model, you would require everyone in a country to keep double-entry books on every transaction they made. That is unlikely to be a very popular policy.

I am not an accountant, this is not financial advice.

In theory, the basic exemptions for each dependent (including, for independent taxpayers, the taxpayer the self) serve a loosely analogous role.

But yes, businesses are treated somewhat differently (but mostly it's businesses, not corporations; an individual with business income and expenses can do the same as a corporation, at least to offset business income -- I forget whether business losses that exceed business income apply against other income, though ISTR they do and that's a key difference between hobby expenses (which can only offset hobby income) and business expenses.

Taxes are levied against profit, not revenue.

If you spend the money on operational expenses (OpEx), then you reduce your profit by that amount and thus your taxes.

If you spend the money on capital expenses (CapEx), you create assets that will depreciate in future. The depreciation can be deducted from your profit and also reduce your taxes in forward periods.

Thus a company can arrange its affairs to have very high free cash flow but low profits. And sometimes vice versa, which usually leads to unhappy surprises for careless investors.

> Isn't corporate income taxed regardless of whether it's put into the bank or reinvested into new ventures?

No, in addition to regular business expenses being deductible, there's all kinds of special deductions and credits for specific kinds of reinvestment.

That isn't how it works.

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