And that will be the case for me next year, so yes, this matters to me.
It is literally backbreaking for a friend who is self funding a team of engineers. The money to pay taxes literally doesnt exist. It was paid as salary.
I told him to ignore the accountants and simply not pay. Let the IRS come after him
But there's a very critical misunderstanding happening in a lot of comments here -the IRS taxes profit (net income), not revenue. Anyone with zero revenue is safe. Anyone with SOME revenue will potentially owe some taxes, and potentially in a very surprising (and unfair, I think) way. The basic example in the submission is quite correct.
>>>I told him to ignore the accountants and simply not pay. Let the IRS come after him.
This is a great way to end up both out of business AND in jail. It is not the smart play.
Not in this case, which is the challenge and pain. You can have a company with negative profit, and have to pay income taxes on revenue.
>This is a great way to end up both out of business AND in jail. It is not the smart play.
Strongly disagree, and this is how I run my business. There is sufficient ambiguity and debate on the topic to support an ambiguous reading. Nobody is going to jail. Worst case scenario you get a nastygram from the IRS in a year or two, provided the issue hasn't been clarified in YOUR favor.
If your company is living hand to mouth with expenses above revenue, the money the IRS wants literally doesnt exit.
Incorrect; you can have a company with negative cash flow and have to pay income taxes on profit - as the IRS defines it. And you can certainly disagree and argue with them about it, but they're likely to win.
>>>If your company is living hand to mouth with expenses above revenue, the money the IRS wants literally doesn't exit.
"I don't have the money I legally owe you because I spent it" is not a claim the IRS is going to care deeply about.
Here's the same situation, for not software. I buy a big fancy truck for my trucking business. It's 100k, capital asset, needs to be amortized over 10 years. I make $100k in revenue that year. No other expenses. What do I need to pay tax on in year 1? The $90k in net income that I have. I can't say to the IRS "but I spent all my cash on the truck" - they'll say "tough, pay us".
edit: as an aside - the above is why businesses usually like to lease or finance - the cash flow matches better.
Obviously, the question is then which one makes more sense for software development.
The absolute worst case scenario would be having to pay taxes as if your revenue was nearly all profit - as if you had no expenses (or very few). As always, you only pay taxes on 'net income' - revenue minus expenses - this whole mess comes about by tweaking how expenses are calculated.