So what I began to learn is that the elite wealthy actually played on a different playing field, that they actually had a different set of rules that they played by, financial rules that they played by. I don’t mean breaking the laws, but I mean they were playing on a different set of rules than the rest of us were.
Some of the things I learned, and some of these you’ll know, many of you are small business people, but you won’t find elite wealthy individuals, by and large, you won’t find them running around, working for a paycheck on Friday. They’re going to be operating a business, and one of the biggest reasons for that is because there are business deductions written into our IRS tax code. The code is there, and there’s provisions for small business, corporations and all of that to use that code to their benefit in order to foster and to grow the businesses.
If it weren’t for business deductions, most businesses would be wiped out in the first three to five years because most of them aren’t profitable until three to five years. In many of our bigger corporations, it’s longer, five to seven years.
So the business deductions are important, so real quickly, just to give you an idea, if you’re a person working for a W2 income, let me give you a real example of how this works. A cell phone’s a great way to look at it.
My cell phone, or the average cell phone in America, runs around $100 a month. That’s $1200 a year, or if you’re working for a paycheck, you actually have to earn $1500 to pay the taxes to have $1200 left to pay for the cell phone. So you actually have to earn $1500 in hourly wages in order to pay for the $1200 cell phone.
But for me, as a small businessperson, as a corporation or whatever entity you might be utilizing, I get to have a tax deduction of $1200, which means I’m saving taxes, let’s say about $300 in taxes that I’m saving, so my net cost for my cell phone is $900. But yours, working for a paycheck, is $1500. The difference on just my cell phone is $600. That’s money that stays into my family and into my life that I get to decide how it’s used instead of in the government coffers.
Now, I’m not against the government having money in their coffers because we need something there, but they don’t need all of mine. We can spread that out a little bit.
The reality, though, is the difference between you and I is $600. Now, my wife and I are business partners, and we both share in our business, and therefore that’s two cell phones. That’s $1200 a year that stays into our family just simply because we were able to use this as a deduction instead of an after tax dollar purchase.
Now, we haven’t even talked about the two computers we have, the software, the internet, the car, the home office, right down to even … Your home office needs toilet paper and coffee. All of these things are legal deductions.
I know during the last election cycle there was a big argument about these business deductions, and a lot of people that are upset about them don’t realize that nobody is taking advantage and nobody’s cheating. They’re using the code that was written, and that code was written and started being written in 1913. So nobody currently using that had anything to do with it.
But understand, they play on a different playing field by a different set of rules, and they’ve actually established some of those things that benefit them, and they’ve kinda put them up on a shelf that you can’t reach. They’re just out of your reach.
With that in mind, thinking through this, I remembered something that Learned Hand had said, now Learned Hand was a federal court judge at the turn of the century, and he made this statement: “Anyone may so arrange his affairs that his taxes shall be as low as possible. He is not bound to choose that pattern which best pays the treasury. There is not even a patriotic duty to increase one’s taxes.”
This comes from one of our top federal court judges. He’s just simply saying, “The law is the law, you can use the law, and you can use that to your benefit as long as you don’t abuse the law.”