Was Kiyoski right when he said a business owner can pay themselves first and the gov taxes whatever is left?

Question

So I just finished reading Robert Kiyosaki's Rich Dad Poor Dad and he stated something about how business owners pay taxes vs how 9 to 5ers pay taxes. He says 9 to 5ers pay the gov first in taxes and they get whatever is left over BUT business owners get to pay themselves first and the gov gets whatever is left through labeling vacation trips, outings, etc as company expenditures. Can owners actually do that? Seems like a loop hole that might be shut down. Idk. Can anyone shed some light on it. Thanks.

Brandon Turner · Answer

Hey @Derron Taqee I think RK was speaking more in the general sense of the idea or owning a business, not prescribing some sort of tax policy with this statement. I think people try to take his info too literally. All he is saying is that when you own a business, the expenses for the business come out first then taxes. However, in your own life, your expenses are taken out after your taxes. So don't read RDPD like it's a science book. It's not - it's an art book, helping to change your mindset. :)

Pat L. · Answer

9-5'ers do submit a variety of taxes each paycheck as does the employer. However, if you are in business for yourself your 'estimated taxes' are due by the required date on the voucher (usually determined by the income from the previous years tax return) or the IRS gets very annoyed. Now depending on how well business is this year the need to come up with the estimated tax due can be challenging. For us the solo-401k is a masterpiece in creating a legit late in the game tax deduction. Now back in the days of exceptional 179 deductions we certainly took full advantage of them, but tax deductions for the sake of same is certainly counterproductive. Currently the advantages to farners making million dollar equipment purchases its an amazing legit deduction that many are certainly taking advantage of. So I am of the opinion that any good RE Investor should also own a farm :)

Collier H. · Answer

Get a good accountant, and pay your taxes! Don't end up like Wesley Snipes..LOL

J Scott · Answer

I'm not going to go into the details of financial accounting and taxes, but the way you explain it above is certainly not true. Business owners can reduce their taxable income by spending some of their income on necessary business expenses, and if you're business is structured properly, you can certainly reduce taxable business income to $0 (by paying out all income in salary and reducing net income to $0) -- but if you're paying yourself salary, you're going to incur income tax (and potentially self-employment taxes) on that salaried income. In general (e.g., most of the time), if you want to pay less in taxes, you ultimately need to put less money in your pocket as well.

J Scott · Answer

Partially true. You'll never legally be able to buy a bunch of classic cars and claim it as a business expenses, but if your company earns $1M, you can certainly buy $1M in office supplies and then not have to pay any taxes. But, of course, then you end up with $1M in office supplies and no salary.

Douglas Larson · Answer

@Derron Taqee I think the concept of paying yourself first is from an old business book, "The Richest Man in Babylon." - at least I think that's where I read it first. The concept is more about making sure that a good chunk of your income actually goes to the things that really matter. If you don't put that money aside first, it's too easy for the trivial and unnecessary expenses of life suck away your earnings. I also love Robert Kiyosaki's stuff. I know his earlier books are more about concepts and less about details but there are great ways to "pay yourself first" especially where taxes are concerned. A good accountant and financial adviser can help you find ways to pay little to zero taxes when you are an RE investor. I've used 1031 exchanges to defer taxes indefinitely. Also, If you've lived in a home for 2 of the last five years you may not owe any taxes on the gain when you sell. Another common strategy for reducing or eliminating taxes is to re-finance an investment property soon after purchase and pull out the equity, which you then use to invest in the next property. As long as the properties cash-flow you can do this several times. Finally, right now I'm using a self-directed ROTH IRA to invest in properties. All of the gains are TAX FREE! Of course I won't have access to that money until retirement (unless I want to pay some penalties) but I'm paying my (future) self first. As you also mentioned, there are certainly ways to expense and depreciate all kinds of stuff when you own a business, unlike when you work for a paycheck. If you search these terms on BP you will find a lot of info from investors much more experienced than I am. Have Fun and Make Your Own Luck!

Xing Zhu · Answer

Suppose the business is a corporation. Shareholders cannot be paid salaries or bonuses by just OWNING the corporation. Of course, they can be paid such if they are employed by the corporation. Then the pay is deductible for the corporation but they pay regular income taxes. Therefore simply saying owners can pay themselves salaries or bonuses is technically incorrect. The owners can be paid in the form of dividends, but it is not deductible for the corporation and therefore in this case the pay is double taxed in the US. In fact, tax-wise smart people such as W Buffett want to take less salaries and more dividends to get a much lower rate than us.

Mehran K. · Answer

@Derron Taqee ,My take on it was that he was suggesting people the change the paradigm of their belief system to pay themselves first before anything else. He was making a point that this should/can be done prior to paying out tax liabilities. Kind of like taking the profit/gains from a flip and using the entire amount to put to work to earn you money (instead of Uncle Sam) for as long as you can prior to paying taxes on it. This would be the opposite of the normal employee on earned income that has their taxes already withheld before their paycheck is payed out. Hope that made sense!

Thierry Van Roy · Answer

it's meant as a principle. You make sure you're not last in line to be left with the scraps after paying tax and employees. In reality, this is a real issue to entrepreneurs who are often the least paid in their own company for years. It's like when Kiyosaki says "don't live below your means". That's not meant as tax evasion either. What grinds me a bit is how this does tend to contradict his good VS bad debt principle. But it's all just principles.

Derron Taqee · Answer

Thanks for the answer. Kiyosaki's idea sounds good but it just sounded too good. Appreciate the clarity. I don't know much about accounting/finance but one could in effect label everything a company expense and get away without being taxed from RK's view.