I am trying to understand this diagram of corporations from "Rich Dad Poor Dad." I can't really make sense out of this diagram.

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  • He's just saying that you get to "keep" expenses in your company, away from your personal calculations/accounting. – Fattie Nov 19 '16 at 17:28
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    What does the text around the figure say? I doubt that the diagram is meant to stand on its own. – Brythan Nov 19 '16 at 22:47

It looks like RK is encouraging tax fraud. Suggesting that one have their business cover personal expenses sounds like the advice that got Leona Helmsley in hot water.

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  • The arrow is from personal income statement to corporate income statement so I doubt what you said. – user4884 Nov 21 '16 at 9:28
  • Hi Fahad, the arrow suggests somehow taking one's personal expenses and move them to the Corporate statement. Out of context, I'd like to know how you interpret this diagram. That's how I read this. – JTP - Apologise to Monica Nov 21 '16 at 10:37
  • Here's an extreme example of this. The issue here was more that they were stealing from the corporation (which was public) but it's a good example of what not to do – JimmyJames Nov 21 '16 at 16:30

These types of diagrams appear all throughout Kiyosaki's Rich Dad, Poor Dad book. The arrows in the diagrams represent cash flow.

For example, the first two diagrams of this type in the book are:

cashflow of assets and liabilities diagrams

The idea being presented here is that an asset generates income, and a liability generates expenses. According to the book, rich people spend their money buying assets, while middle class people buy liabilities.

The diagram you posted above does not appear in the edition of the book I have (Warner Books Edition, printed in 2000). However, the following similar diagram appears in the chapter titled "The History of Taxes and the Power of Corporations":

"how the rich play the game" diagram

The idea behind this diagram is to demonstrate what the author considers the tax advantages of a personal corporation: using a corporation to pay for certain expenses with pre-tax dollars. Here is a quote from this chapter:

Employees earn and get taxed and they try to live on what is left. A corporation earns, spends everything it can, and is taxed on anything that is left. It's one of the biggest legal tax loopholes that the rich use. They're easy to set up and are not expensive if you own investments that are producing good cash flow. For example; by owning your own corporation - vacations are board meetings in Hawaii. Car payments, insurance, repairs are company expenses. Health club membership is a company expense. Most restaurant meals are partial expenses. And on and on - but do it legally with pre-tax dollars.

This piece of advice, like so much of the book, may contain a small amount of truth, but is oversimplified and potentially dangerous if taken a face value. There are many examples, as JoeTaxpayer mentioned, of people who tried to deduct too many expenses and failed to make a business case for them that would satisfy the IRS.

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    Nice excerpt. And fishy, to say the least. Any W2 employee would be over the line by creating a corporation to funnel income and expenses this way. And anyone with a legitimate business already knows this and handles their own affairs accordingly. – JTP - Apologise to Monica Nov 21 '16 at 17:02
  • Over here (Germany) such transactions are called non-cash benefit (geldwerter Vorteil). Typically they are legal iff you declare and pay income tax for the value received, a few are exempt from taxation - usually the ones that come at no to low cost for the company (e.g. allowing private use of office phone). But employees can receive them just like owners. And by the way, also employees can deduct costs necessary for earning their salary from taxable income. Which largely levels the differences. – cbeleites unhappy with SX Nov 22 '16 at 19:39

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