0

Imagine an American LLC which buys some commodity (e. g. gold) for every dollar that it owns (after taxes). At the end of the year, the company has 0 dollars in the bank (because all money was spent buying that commodity).

Does this company have profits from the point of view of the IRS? Does it need to pay corporate income tax in this case?

2

If the company would have made $100,000 in profits but bought $100,000 worth of gold for $100,000 then they still have $100,000 profits. If the gold price changes, they'd have a bit more or a bit less profits, they also would have a bit more or a bit less of value.

If the company buys pens, paper, toilet paper etc. for their office that reduces the profits. If the company buys a computer that has to be written off over say four years, so their profits are reduced by a quarter of the purchase price each year.

If the company tries to game this - like if the four owners each have a child, and the company pays $25,000 for a drawing made by each of the children - the tax office will come down on them like a hammer. Same if the company bought gold for $100,000 and each of four owners took $25,000 worth of gold home and sold it.

| improve this answer | |
1

The IRS taxes income. Converting that income into gold, bitcoin, foreign currency, or printer ink cartridges doesn't make it disappear. However, businesses can deduct many of their business expenses from their income.

Are you a gold smith? Did you buy the gold as part of your working inventory? If so, you can probably deduct the cost of the gold as an expense when you sell it; while you still hold the inventory it’s an asset, not an expense. Are you a software developer? Then the IRS is going to want to know why your business needs required you to buy the gold, and will treat it as an investment.

| improve this answer | |
  • I think you mean profits, not income. If that goldsmith creates and sells a gold ring for $10,000 that's $10,000 income. If they had to pay $5,000 for gold and a diamond for that ring the income is still $10,000 but the profit is down by $5,000. – gnasher729 Dec 8 '19 at 19:18
  • 1
    @gnasher729 this may be a question of semantics. The IRS universally refers to "income tax" not "profit tax". In the implementation of the the income tax they do allow you to deduct most "legitimate business expenses" from your taxable income, which in simple cases makes it equivalent to a "profit tax", but there are all sorts of complications like depreciation schedules that make it different from a simple "profit tax". – Charles E. Grant Dec 8 '19 at 19:26
  • 1
    @CharlesE.Grant the goldsmith can’t deduct the value of their gold inventory until it’s sold or otherwise disposed of. Inventory is an asset, not an expense. – Dale M Dec 8 '19 at 19:46
  • @DaleM thanks for that correction and edit. – Charles E. Grant Dec 8 '19 at 19:59
  • It might be useful to see what the IRS actually says about business expenses: irs.gov/businesses/small-businesses-self-employed/… and some parallel link for corporations. – user6726 Dec 8 '19 at 20:01
1

Tax liability is calculated based on profit earned within an accounting period. Profit is increased by income (an increase in assets or a decrease in liabilities) and decreased by expenses (a decrease in assets or an increase in liabilities).

Working through your scenario: when the LLC spends all of its cash (an asset) on gold (also an asset), there has been no change in the dollar value of assets (assuming the price of gold is constant). Therefore, no income has been earned, no profit has been made, and no corporate income tax is payable. It is important to note that this only holds if the LLC has been holding this constant amount of cash since the start of the accounting period.

However, there seems to be an underlying assumption in your question that the initial cash assets were earned through business operations. In that case, there has been an increase in cash assets across the accounting period. That means the LLC has received income, and therefore profit within the accounting period. Therefore, the LLC will have to pay tax on its profits. It does not matter what form the assets end up in.

| improve this answer | |

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.