On Making Tax Returns Great Again

b-corporation transparentTo anyone that doesn’t own a business, here’s a primer about personal and business tax returns, the difference between traditional corporations and benefit companies, and why transparency is so flipping important in today’s business and political world.

In America, the 1040 tax return reports your personal taxes owed from all income sources, including business(es). It is not a Schedule C form, which shows income you earned from a business, or a K-1 (form 1065), which shows income earned from a partnership. It is also not the same as a 1120, which is the tax return for the business itself, or an 1120-S in the case of a multi-owner partnership. The 1040 has very little to do with any business aspect of your tax situation, as business and personal taxes are treated separately by the IRS.

Although shareholders or owners personally pay taxes based on profit a company may have earned, a business’ tax liability is documented and reported separately. There are other factors, but this is in some way how businesses “are treated like people” in American business, because the two are taxed separately. A business, in the eyes of the IRS, is subject to very different rules of tax reporting.

For example, if your business files a net loss for a given year, it doesn’t receive a refund following your tax filing.  You simply owe no taxes for the business’ operations in that year, and you can carry that loss forward to offset any future profits the business may earn in later years. Schedule C and form 1120 show this clearly. And yet, you may have a 1040 return indicating you personally owe taxes, such as from earnings on capital gains (from stocks), or passive income on earned interest, unrelated to your business(es).

There are companies out there, and I could name several of the largest competitors in my industry, each of which have more than $1 billion in carried-forward debt for more than a dozen years, which means they can earn as much as they want, and yet, until that debt is fully “balanced out” with reported profits, neither those mega corporations, nor their owners, pay a single dime in taxes. For the entirety of one company’s operations, for example, one that used naked women to sell domains to NASCAR fans, that company has never once reported a profit, in the 18+ years of its existence. So no taxes have ever been paid on its revenue, ever.

Business tax returns can show many “interesting” details that you don’t find on personal returns: Side businesses and assumed business names commonly involved in umbrella companies and schemes, additional shareholders no one would otherwise know about, foreign subsidiaries and tax shelters that are fully legal in the eyes of the IRS, and retained earnings and distributions paid out tax-free as they are a release of assets, to name but a few. A business tax return can tell you immediately whether the company you’ve publicly come to know about, is truly the same company the IRS privately knows about.

The concern many have about our current President’s reluctance to share his tax returns are based on 1) He promised to release them and yet refuses; 2) It’s a simple act of transparency and addresses the point that if you have nothing to hide, then prove it; 3) No, it’s not enough, when you have established a long list of lies you have openly admitted to telling, for us to take you at your word that your taxes are above board; And 4) Those of us who regularly file our business tax returns understand just how telling it is about us as owners, how we run our business, and whether we are honest, versus pulling the wool over the eyes of everyone we do business dealings with, including our government.

Anyone who has maintained a business of many years should know the importance of an accurate and honest tax filing. Though the IRS only cares about the past seven years of a person’s or business’ returns, a lot can happen in those years. So with only a partial return, say… something from 2005, it’s not enforceable or audit-able, it’s meaningless in the present history of that company’s operations, and it says nothing about what current or carried-forward debts that company may hold and which it is in fact hiding from its non-ownership shareholders.

And that is why I feel our President isn’t offering up his current returns. It has nothing to do with us, the general public and our trust or distrust in him. It has much more to do with his sworn commitment to uphold profit motive for the shareholders that have invested billions in his enterprises, and whether he has breached his fiduciary duty to act in their interest first. Remember that phrase.

As bad as all the lawsuits may have been for the reported 41% of his failed businesses, can you imagine just how bad it would be for our current President for the shareholders of his businesses to learn that he didn’t act in their best interest? Tremendous power is given to shareholders of American businesses: Owners and officers can get sued and thrown in prison faster for lying to shareholders, than for committing violent crimes.

That is what is meant by the phrase, “fiduciary duty”. In a traditional corporation, the officers running the show are there to earn money for the company’s shareholders. If they don’t, they can be forcefully removed from that office, sued, and jailed. As much as it sounds nice to have investors who will front you capital for whatever plans you may have, they want their share to, and if they don’t get it, they are lawfully given the power to come after you personally for it. This is the primary reason many corporations push profit motive first and only, at all costs. It’s a way of keeping the investors happy and the officers out of jail. It’s also a way to wreck the planet, screw others in your industry out of business, and forcefully push droves of employees to the brink. Just think about a popular smartphone maker’s Chinese employees committing suicide at a giant manufacturing plant. That happens because profits are more important to its shareholders, than are its workers’ well-being.

This is one reason why in the current shifting tide of business, benefit companies and B Corporations are increasingly important and popular. They require a company’s officers to act not only in the interest of investors, but also to care for the environment, the community, and employees, which may come at a cost of profit to the shareholders. Benefit companies have in their operating agreement and articles of organization, language protecting officers’ rights to do just this. If you’re a shareholder in a benefit company, you cannot sue the officers for doing things that say, might help the environment but at a cost of less profit.

There are also mandates of being transparent and upholding business ethics. As an owner of a benefit company, I can be held accountable and even sued by a member of the public, if it is determined I acted on profit motive before considering the other requirements. My fiduciary duty goes far beyond profit motive. It forces a different type of conversation, you see. It promotes healthy business that yes, loves profit, but all the more cares about everything and everyone touched by that company’s operations.

Before you think I am complaining, I chose this path for my business. I couldn’t imagine it any other way. It’s something I believe in so strongly, that I willingly did this and have subjected my company to intense scrutiny in the name of accreditation as a B Corporation. It helps create trust with my customers, and I believe it makes for better business, period.

For me at least, it was an easy choice. And so, I put my money where my mouth is. My combined business and personal return, though small in comparison to large companies, still results in dozens of dense forms and pages. It’s quite a read. And yes, I have willingly opened my books to outside scrutiny as part of my company’s B Corporation certification. It’s a requirement, as a B, to permit third-party auditing. I believe so strongly in backing up my words, that I have had no hesitation to provide them this information.

In today’s world, it’s not enough to say something. You need to prove it. Third-party accreditation, such as the B Corporation seal you see all over this website and by our brand, are there to serve as a reminder that we stand by our commitment to honesty, integrity, and transparency. The B seal is a symbol of something you can trust in a business world full of uncertainty.

David Anderson

This blog is published by David Anderson, Principal and owner of Canvas Host.