The "tongue-in-cheek" article below was written by my son a few years ago in response to someone that was trying to sell us services for reducing our tax liability. We told that person we had no interest in his services. This article explains why. I am super proud of my son, and his perception and knowledge of the situation.
Nevin
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How to Completely Remove DP Creations LLC’s Tax Liability:
Cease all DP Creations LLC operations.
That’s it! It’s just that simple! No more tax liability! The IRS won’t get a penny! Obviously, that is not an ideal solution, which means there’s more to the equation than simply mitigating tax liability. There are additional methods that could be explored, but each carries its own set of limitations:
Charitable Contribution: Donate all the Net Income to 501(c) organizations, such as the schools. This will off-set the 41.95% marginal tax rate incurred by Net Income earned by DP Creations, but will also completely starve DP Creations of all re-investable funds. Zero Net Income = Zero Growth. When there are excess unallocated funds laying around, ABSOLUTELY—give it to the schools! Otherwise, it is a bad idea.
Taking Out a Loan for Charitable Contributions: This solves the issue of not having re-investable funds in the short term, but merely defers the problem to a later date. Loans have interest. Interest must be paid. Loans must eventually be repaid. To continue to off-set DP Creations’ taxable income through this method, it would eventually become too much of a burden to bear, and would result in eventually ceasing operations. This is a viable solution for a temporary high tax liability, but is not a viable solution for a recurring liability.
Debt Forgiveness: When (not if) the debt becomes too much to bear (from doing the above), debt forgiveness could always be negotiated, right? Well, yes, maybe… But that debt forgiveness becomes taxable income, which kind of defeats the whole purpose. And that taxable income will come at an even less convenient time.
Investing in NOLs: (NOL’s are explained at https://www.investopedia.com/terms/n/netoperatingloss.asp): This could potentially be viable, except changes in tax regulation put severe limitations on how much of an NOL can be absorbed per year. And NOL carryforwards do not last forever. This means you will NEVER recover the full amount put into the NOL in just the NOL carryforward. There must necessarily be additional benefits from the NOL, otherwise you incur the problems previously discussed, such as completely stopping growth of DP Creations, which, again, is not a solution.
Existing NOLs: What are these? What do they do? Why would we invest in them? How confident are we that their reported taxable income (or loss) is even accurate? Do you see the problem?
Phantom Debts: Super illegal. Not an option.
Finding ways to reallocate growth operations in a way that does not incur additional tax liability…
R&D Costs: Generally, Research & Development costs are fully deductible as expenses. This is a very good way to invest for growth. However, the tax problem does eventually come back—to some extent—when these R&D operations result in usable products, processes, and assets, which in turn may become taxable. It can curb liability, but it cannot defeat it.
Lobbying for Tax Breaks/Credits: Good luck with that…
The basis for our decision to simply swallow the tax liability is simple. We believe that the negative impacts to growth of DP Creations, or the risk of it dying altogether, is not justified by the benefits received on the other end of the transaction, nor is it something that is worth avoiding tax liability over.
To avoid tax liability is to cease operations. We are not interested.
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As can be seen from the article above, any tax "avoidance" scheme that merely pushes the tax obligation into the future is usually not a good plan.