Use The Tax Laws As They Were Designed
Most people are conditioned to fear the law. Sometimes they don’t understand the law. More often they just see the law as a bunch of rules that get in their way of doing the things they need to do. So it is natural that I get pushback when I tell small business owners they should be using the law to make more money and increase the value of their companies. Few people understand that you really can use the law that way. But big business understands and embraces the concept.
There are many, many examples of how business leaders influence lawmakers to create barriers to entry into their own business sectors and thereby protect their market position. You know, lobbying. But there are laws already on the books that have been designed to help companies, and you should be taking advantage of them.
Consider the complex tax code. Apple Computer has been in the news recently for its practices designed to take advantage of the specific way the laws are written. (See https://www.nytimes.com/2012/04/29/business/apples-tax-strategy-aims-at-low-tax-states-and-nations.html?_r=1&pagewanted=all.)
Of course, protesters complain that Apple is not paying their “fair share” (see https://www.huffingtonpost.com/mobileweb/2011/06/04/apple-taxes-protests_n_871309.html), but one must believe the that politicians in Congress and each State knew what they were doing when they created their tax laws, right? After all, government knows what is best for all of us, isn’t that the religion nowadays? So Apple’s use of the tax laws, purposefully written by politicians, is not only justified, it’s downright patriotic! They are doing exactly what lawmakers are expecting, you could even say “forcing,” them to do.
So what does Apple do, and can you take advantage of the same tactic? Well, if you have properly registered your intellectual property, you are in exactly the position Apple is and yes you can do it too. You see, intellectual property (patents, trademarks, copyrights, even trade secrets) is treated in the law very much like real property. The important thing to realize is that property can be rented, or “licensed” as it’s called when intellectual property is concerned.
Many of you may own the building where your company resides, and you lease that building to the company. That is a completely acceptable procedure, and very common. Your company takes a deduction for the rent it pays on the property, and you, the landlord, increase your taxable income by the amount of rent you take in. No big deal, right?
Well, consider the same scenario, except this time the “property” is a patent (it also works with other forms of intellectual property, but the big technology companies like Apple primarily do this with patents). Further, the owner of the patent is a company headquartered in Nevada. That company licenses (rents) the patent to your operating company, located in, say California. Just as in the case of real property rental, the patent licensee (the renting company) pays the licensor (the landlord) fees (rent) for the use of the property and deducts those payments from its income. Then the licensor company increases its taxable income by the amount of the license payments. No big deal, right?
Except that Nevada has no corporate income tax, and California has a big corporate income tax. So the licensor company pays no state income tax on the license income, and the licensee gets a very worthwhile reduction in its taxes because of the license fees it pays.
Of course, if you own both companies, this little procedure saved you a bundle of state taxes. You used the law to make more money, just like the politicians intended for you to do! Oh, and this same procedure works not only to save state taxes, but to save federal taxes, when the licensor is located in a low tax country, like Ireland, and the licensee is located in a high tax country, like the United States.
Like I said, this procedure is not only legal, but when you realize that the politicians who set up these tax laws claim they know what is best for everyone, this practice is what they must have intended!
So go ahead, ask your tax professional advisors: Can you use the law to make more money like Apple Computer and many other large companies do?
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