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Is it true that in a business or an investment, we only pay tax if we make a profit? That is, if we make only a loss, there is no tax?

Why is this so? Because from what I understand, the tax is paid to the government because we are using the resources (roads, public libraries etc) built on government money. And we need to pay money to maintain these resources.

Now the man that makes a loss used these resources as much as the man that made a gain. So why does only one of them pay tax? Is the reason purely humanitarian?

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If we paid money on the basis of the resources we use, then instead of taxes, we should be charged per fireman visit, per police call or visit, per mile driven, per book checked out... And everyone would pay the same amount for a given service. This would be fairer in the sense that we'd pay for what we used, but it would also leave the poor paying a far greater proportion of their income for these services than the rich. – Kyralessa May 4 '11 at 23:36
Look at the bigger picture as well: even though that one man lost money, that money went somewhere to someone (suppliers, customers, etc.) when it went to that other person it was likely counted as income and therefore taxed. – The Matt May 5 '11 at 0:19
Or look at the smaller picture. Why is it fair that an individual with a job pays income tax, but someone without a job doesn't have to? The same logic applies. – JohnFx Jan 22 at 0:37
This question can be answered with another question: If we tax businesses on money they don't get, shouldn't we also tax unemployed people on money they don't earn? – NexusArtist Jan 22 at 19:39
Or you could consider a parallel with personal income tax. In the US, if you make less than a certain amount (personal exemption(s) plus standard/itemized deductions), you not only pay no tax, you might get some extra money from the Earned Income Credit. – jamesqf Jan 22 at 19:44

6 Answers 6

up vote 5 down vote accepted

You mean to tell me that everyone doesn't pay his/her fair share?! Please say it isn't so. :)

Therein lies the welfare state: Tax the rich more heavily to subsidize the poor, and hobble the rich's ability to do so on their own accord.

In any case, though, in the United States, if you make any money whatsoever, that usually counts as income, and can hence be taxed. Here's the IRS' definition of gross income. Pretty all-inclusive, isn't it?

Businesses are allowed to deduct expenses to count against their income, but if one has more expenses than income year after year, (a) this is the road to financial ruin, and (b) the IRS puts an end to the tax losses after enough years of failing to show a profit.

So, sure, if a businessperson doesn't have any income, then they're technically using the roads, etc., "for free," but unless the businessperson wants to live off the land and the kindness of strangers, he'd better turn a profit eventually. Then he'll be taxed.

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Are you even reading the question? It's about taxing businesses that make no profit. – DJClayworth Nov 2 '11 at 13:50
You might remove your political digs from the answer. They are not helpful in any way. – gnasher729 Jan 21 at 10:37

There is more than one kind of tax. It is a little confusing because in reality the tax revenues collected by the Government aren't earmarked to a particular usage based on where they came from, usually. Well, the Gov't often CLAIMS they do, but for all practical matters it all goes in a big bucket. So just because a business or individual isn't paying income taxes doesn't mean they aren't paying anything for the use of Government furnished infrastructure/services.

You are limiting the scope of your question to Income Taxes, which are taxes paid on profits to a business or individual. It makes perfect sense that you wouldn't pay a tax on something you didn't get.

However, you aren't considering taxes that ARE being paid even by a company that isn't profitable. For example consumption taxes, employment taxes, and other fees. That same company paid sales tax on all the supplies it purchased, and probably collected/paid sales taxes on anything it sold. To take one of your examples, it paid for its share of using the roads through Government imposed taxes on fuel.

Don't worry about the Government. They know how to get theirs. They might not pull it from your right pocket, but they will make sure to get it from the left.

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The business may not have paid any direct tax towards profit.
However it would have paid tons of indirect tax like Sales tax / Service tax on the goods / services rendered.
The raw material that he has purchased from vendors [leading to demand] would have been taxed. The salary he has paid [hence employees paying personal tax]

So essentially even from a loss making venture, the Govt has received enough tax money.

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Not charging taxes on a money losing investment or business is much more than humanitarian it is common sense. In general money that is used to invest has already been taxed as income or inheritance to the person making the investment so taxing that money again not just the profit would provide a disincentive for people to invest. Which would be bad for economic growth over the medium and long term.

As far as taxing a money losing businesses goes, most businesses don't make money in their couple of years and adding further tax burdens would be counter productive because it would provide a major hurdle for people wanting to start a business. Other have already mentioned that the money losing operation likely paid indirect taxes as well. Small businesses provide a majority of the economic growth and innovation.

So in short additional taxes on money losing investments and businesses would be both foolish and shortsighted.

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Think about it from a more pragmatic POV -- on what basis would you levy taxes on money that is lost?

If your house were robbed, should you have to pay taxes based on the money stolen from you? What if your car breaks down?

Income in its simplest form is revenue - cost of goods sold. So if I buy a car for $10,000 and sell it to you for $8,000, I have negative income.

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In the UK, I could start my own business - either as a self-employed person, or by starting a company. With a company, the company might have £50,000 income, £5,000 cost, and pay me a £45,000 salary. In that case the company has no profit and pays no taxes, but I personally pay income tax. Or I could pay myself any salary I like, say £20,000 salary, so I pay tax on £25,000 profit and £20,000 salary. The state actually gets less money in total if I set my salary so the company makes a profit.

If I'm self employed, income minus cost is my profit and I pay taxes on that. If I don't make profit, I pay no tax. Unfortunately, I also wouldn't have any money to buy food, pay the rent, and so on and so on. I'd have the same income and pay the same taxes as someone who is unemployed.

There are "businesses" that are just run for the enjoyment of the owner and don't make profit. Rich guy buys a farm and starts breeding race horses, that kind of thing. In that case, there is zero difference between a guy breeding race horses and calling it a "business" and another guy breeding race horses and calling it a hobby. Neither makes money and neither pays taxes.

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