Corporations and reducing tax

[Ryan Crowley]

Hey everyone, like most people here, I have read Rich Dad Poor Dad several times now and am inspired each time I read it.  In there he mentions creating a corporation to significantly save on taxes.  He references being able to take your income, then pay certain expenses (like your car payment and vacations) and THEN whatever is left over after that is what you report for tax purposes.  In other words, you can spend most of your income prior to paying any taxes on it.  Has anyone done this with their real estate or other business or have the tax laws changed since then? Thank you SO MUCH!

[David Saperstein]

Yes you have it right, but to specify -

The key here is defining "income" versus "revenue". You are taxed on income (i.e. profit), which is effectively the money left over after business expenses. So in the scenario you laid out, $3000 would be the income of the business, and therefore is what is taxed. Your $5,000 a month in revenue is your "top line", and not taxed, because nothing has been deducted from it yet.

There are a number of things besides normal expenses that can deduct from your top line to get to taxable income. If you've ever heard of EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization), it's another term to describe your "top line" earnings before deducting all the things that the government allows you to deduct.

Depreciation on your business vehicle, for example, might lower your ultimate tax amount, so instead of being taxed off of $3000, you're only taxed off of $2500 (you got to deduct $500 of depreciation off of your earnings).

This is only scratching the surface to how this works, and there's a lot to unpack here. But this should give you a sense of what to start learning