A Basic Fairness Problem in the U.S. Tax Code

Neil Irwin explains how surprisingly simple it is to claim tax deductions for personal expenditures as a business expense. And it’s legal.

Using the Michael Sorrentino tax fraud case as an example, Irwin notes that the case highlights “a basic fairness problem in the tax code. Mr. Sorrentino did plenty of things to avoid taxes that were perfectly legal, showing how those with the resources to hire accountants and lawyers can end up with lower tax bills than people with a regular job.”

“In other words, if you stay away from the really egregious deductions, like trying to deduct the expense for your daughter’s wedding as a business entertainment expense just because a couple of colleagues were invited, you’re probably going to be just fine.”

“Compare that with a guy who earns a regular paycheck at a standard job. All of his income is reported to the I.R.S. on a W-2 at the end of the year. He probably won’t have any way to deduct dinner with friends, or tickets to a game, from his income taxes. And he probably won’t be able to pay accountants to help him brainstorm plausible deductions and to help keep him just on the right side of ‘legal.’”

Working Capital Review: What’s ahead for global tax structures?

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