How to Legally pay No Tax In the United States
By: Roshan Singh
Tags: Investment, Advice, Business, Taxes, United States

How to Legally pay No Tax In the United States

How some of the biggest companies of the United States spend almost nothing on taxes?

Photo by Olga DeLawrence on Unsplash

Imagine this you were just hired as the president of Intel your starting salary is $1,000,000 per year, you pick up the phone and call your family to give them the good news that you are finally a millionaire well not so fast with all this excitement you forgot to consider the hard reality of making money in today’s social-economic world.

Taxes with 1 million dollars in earned income you will have to pay over $300,000 in federal taxes $29,000 in Social Security tax over $100,000 in state taxes assuming you live in California where the company headquarters is located this means that out of your million dollar salary you will have to pay $468,590 in just taxes this is over 46% of your total income going to taxes.

It is very little you can do to change that and if you try to evade taxes you can end up with a fine up to $250,000 on top of what you already owe so much for being a millionaire but wait a minute if the IRS doesn’t joke around with their taxes.

Why do we keep hearing about wealthy people and companies not paying taxes?

There are some of America’s biggest companies reportedly paid no federal income tax. Billionaire Donald Trump pays no federal income tax, those massive companies paid no federal income tax. This got me curious, what if these guys do differently to avoid taxes without any consequences from the IRS? Well as it turns out the tax code can be a little complicated and some of the wealthiest people in the world found a few loopholes to keep their money away from Uncle Sam’s pockets.

Turn your business into a corporation

One of the most simple yet fastest ways to start saving money in taxes if you already have a good business is to turn your sole proprietor business into a corporation because these two are taxed very differently. When a person does a business as a sole proprietor they are combining their finances with their business finances and their business income will be taxed just like earned income.

Which can go up to 37% just for federal taxes alone so if you made a million dollars a year as a sole before you will be on the hook to pay up to $370,000 in just federal taxes but if you are a corporation you will only have to pay $210,000 in federal taxes since the corporate tax rate in the u.s. is 21% becoming a corporation will automatically save you $160,000 in federal taxes for that million-dollar year.

This number used to be higher in Trump’s presidency corporate taxes went from 35% down to 21% with the tax cuts and Jobs Act of 2017 the only downside here is that since the corporation is a different entity than the owner technically you don’t own that money the corporation owns the money and you own the corporation.

If you want to move the money from the company’s bank account into your bank account by paying yourself dividends you will have to pay an additional 15% to 20% dividend distribution tax in some cases this double taxation still ends up being less than if you were to pay earned income tax. Many people even celebrities are beginning to use corporations to run their businesses.

This not only allows the owner to take advantage of corporate tax rates but also to claim any expenses related to the business as a corporate loss many successful corporate owners by their luxuries like a nice car or at least a beautiful house as long as is related to business. Which allows them to claim those purchases as a business expense.

It lowers the taxable income of the company lowering their tax bill in a sense they are allowed to spend money that is related to their business. Before the IRS comes to claim their share now this is an easy way for anyone with a good business to reduce their taxes but not eliminate them there are a few other loopholes the wealthy use that allows them to not pay any taxes.

Tax Heavens

If they don’t want to a very common practice of multi-billion dollar companies is the use of water called tax-havens. These little handy loopholes are companies that are placed in offshore countries to offer these corporations an individual little to no tax liability and legally they can share no financial information about the company to foreign tax authorities like the US.

Some tax havens are places like the Bahamas Bermuda Jersey and the Cayman Islands just to name a few now companies can’t just send their money to a bank account to the Bahamas to avoid taxes there has to be a legal structure that takes advantage of the current tax laws to pretend like they made less money than they did.

For example, let’s say that you built a company and you made $100million in profits this year this means that in the U.S you will have to pay 21 million dollars in corporate taxes based on the 21 per cent tax rate but what if you can tell the government that you only made 20 million dollars instead of a hundred this means that you would only have to pay 4.2 million dollars in corporate taxes instead of the normal 21 million.

How do you do that?

The way many companies can legally do this is by creating a company offshore like in the Bahamas and transferred the ownership of their patents trademarks and intellectual property from the real company in the U.S. to their other company in the Bahamas and when Uncle Sam comes to collect 21 million they can just say sorry we have to pay 80 million dollars to this other company in the Bahamas to license their patents.

Now they have successfully sheltered 80 million dollars offshore and paid zero dollars in taxes for them because the Bahamas happens to have a zero % corporate tax rate and instead of paying 21 million dollars they only paid 4.2 million dollars saving around 16.8 million dollars in taxes this means that instead of paying 21% taxes they only paid 4.2% of their total profits this strategy might save lots of money in taxes.

It also has its flaws while this money is hidden offshore it cannot be used if the company tries to bring the money back to the US it would be taxed this is what created Apple’s cash problem they had lots of money in the bank but it was out of reach because bringing the money back would mean paying the taxes.

They were avoiding in the first place so what would be the purpose of hiding money offshore if can use it well companies sheltered their money offshore to be brought back when an opportunity to save in taxes comes to light. This happened in January of 2018 where the corporate tax rate changed from 35% to 21% given the perfect opportunity for companies to bring back their money and pay less and taxes.

If you paid attention in the news over the last year Apple has been aggressively bringing back their money and buying back their shares which in turn makes them more money by increasing the price of the shares which can allow them to save in taxes differently.

Many company executives prefer to get paid a portion of their compensation in stock options here as the company evaluation goes up. They can create new shares to pay their executives this creates a couple of benefits. One the executive won’t pay any taxes on that compensation until they sell their stock which puts them in control of when they are taxed. Second, the company can report losses and form of salaries without actually losing cash.

Since they can just create new shares they can legally report the loss but not lose the cash in essence they are printing their own money in form of shares to pay their executives.

Now getting paid in shares can also create another loophole for company executives to avoid taxes. Since they get paid in shares the executives can use those shares to purchase stock options which can be used to borrow money from an investment bank. While using their shares as collateral this allows them to bypass the capital gains tax given them free money.

They can neither repay later from their profits of using the money or handing over the shares themselves given them tax-free money. A good example of this is Elon Musk in 2017 he used about 40% of his shares in Tesla as collateral for loans. Which at the time was amounted to over 4 billion dollars. In Tesla shares used as collateral in 2019, he reportedly owes over 500 million dollars backed by his ownership in Tesla. It is unclear why he used the money for but many say that he used this money to invest in his other companies.

Shell Companies

A very interesting trick that many wealthy corporations use is shell companies. Which are companies that do not have a physical location don’t have any products or any employees but are used to hold bank accounts. Where money can pass through to avoid being taxed. A good example of this is the company Apple.

Apple reportedly had around $285 billion hidden offshore as an American company that does business internationally. Apple would have to pay US taxes from the money that was made in other countries since the u.s. is the only country that taxes based on citizenship. The company would have to pay the taxes from the country it operates in and the rest would be paid to the US to complete that 21%.

When there are a will and billions of dollars at stake there’s a way Apple decided to create a company in Ireland where corporate taxes are 12.5%. Then they create another company in the Netherlands and lastly they have another company in Ireland that has a legal residency in Jersey an island off the coast of France.

That you guessed it has no corporate taxes so the company in Jersey who owns all the patents and all the intellectual property license the properties to the company in the Netherlands. Which is more of a bank account than a company this company in the Netherlands subleases the property to the company in Ireland, which is the company that takes care of their international operations.

This means that when someone buys an iPhone in Europe the money goes to the Irish company, that takes care of the operations this money briefly flashes in a Dutch bank account before retiring back in Ireland since the company is legally registered in Jersey. it cannot be taxed and that is how to save billions of dollars from being taxed.

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