That's not equivalent. An equivalent example would be a person who makes a large amount of money in their 20s, but spends the majority of it on things that could conceivably appreciate, such that their income artificially represents a loss. Then all of a sudden, whatever they spent money on becomes extremely profitable in their mid 30s.
Someone doing that will normally do it within the confines of an LLC by convention (because it almost always implies a business). But you could do it with investing, too. In either case you need not be a megacorp.
There are also income tax offsets for education, provided your tax bracket isn't too high.
> That's not equivalent. An equivalent example would be a person who makes a large amount of money in their 20s, but spends the majority of it on things that could conceivably appreciate, such that their income artificially represents a loss. Then all of a sudden, whatever they spent money on becomes extremely profitable in their mid 30s.
Like someone getting a $150k student loan to go to college and/or post-college education?
No, because that's a loan rather than an R&D expenditure from income. I guess that probably sounds flippant, but the mechanics are different. If a business received a loan, the tax prospects wouldn't be as favorable as expenditure either.
Different how? Different in practice or in tax law?
The point of the thread is that the two are essentially the same in practice (investing current monetary influxes towards future revenues) but the tax law differences favor one over the other.
True, but I think the sentiment isn't "make individual loans work like business investments" so much as it is "make business investments work like individual loans". In other words, if individuals are expected to pay taxes, businesses should be expected to pay taxes as well (rather than being allowed to minimize them due to earlier losses).
It's not black and white, of course, and I'm not an accountant, so my knowledge is limited and most likely filled with holes and misunderstandings. But I imagine there's also a matter of scale that's at play here, with tax laws meant to make things easier on small, privately owned businesses in their early years, having unintended consequences to the benefit of companies already behemoth in size investing in getting even bigger. Bigger in ways only made possible in the new digital, globalized world.
loans are different for corporations due to the interest being deductible (colloquially called 'tax shields'). along with the carryforward provision, that can so valuable that it's the principal reason why a given company is bought. personal loans have no such leeway and value.
The interest on personal loans is also deductible, if used for (a) education, (b) buying a residence, or (c) for business activities of the individual.
sure, there are a few exceptions, but carveouts result in distortions that lead to unintended consequences, as we see in all of those instances (e.g., higher economic rents). for greater fairness and more efficiency in markets, we should reduce carveouts for both corporations and individuals, not try to justify the ones we have.
it's difficult to get to 30% of EBITDA (the actual yardstick) in interest payments, but if you do, the carryforward is unlimited, so it's effectively unlimited.
The actual yard stick is only EBITDA through this year, and EBIT thereafter, and moreover, it's the tax versions of EBITDA and EBIT, not the accounting versions. For starters, the tax versions use taxable income as the base, not book income, and don't add back in most non-cash items, so the threshold is much lower.
Many businesses were hit by this interest limitation in 2018 and 2019. There are dozens of articles from major tax firms about it. Yes, a business can carryforward their unused interest to a future year in which they have spare income to apply it. But that means they have to have sufficient profits and reduced loans in order to take advantage of their interest expenses. If a business is unprofitable, churn loans, or increases its debt load, the business effectively loses out on a lot of the benefit of most of its interest expense.
ok, i'll take your word for it since it's not something i follow that closely.
i'd just also reiterate that all this rigamarole is not worth it (for the generally claimed increase in productivity and investment), and we should just simplify and equalize individual and corporate tax law.
Of course not. The $155k tuition is the loss. The $150k loan is just a sudden influx of money used to compensate for the investment losses, the same as a company receiving investment funding.
If you do that by investing, it does work the same way. You can roll forward capital losses indefinitely and offset them against future capital gains, something which investors in 2000 and 2008 became well-acquainted with.
The difference is few people start with financing that allows them to amass large investable sums without showing a cash income early in life. That’s because companies can raise VC and sell equity while we (rightly, of course) banned the equivalent practice for people.
Someone doing that will normally do it within the confines of an LLC by convention (because it almost always implies a business). But you could do it with investing, too. In either case you need not be a megacorp.
There are also income tax offsets for education, provided your tax bracket isn't too high.