Rusty, if someone runs their own business, working hands-on or by managing it, and they think their efforts are worth $100K a year, and they fully expect to see the value of their business to go up at least $100K because of those efforts, then why shouldn’t they pay income taxes on $100K every year, just like everyone else who works that much?
I thought the tax rules for business owners were that, in deciding how much of the annual increase in the business’s value was taxed immediately as income vs later as capital gain, the income had to be a fair value for the owner’s working contribution to the business. It seems to me that if someone is declaring on a loan application that the fair value is X, then the gross amount of income on their tax return should also be X.
I don’t know much about the underlying principles of tax law as they apply to the self-employed, much less the gray area loopholes in practice. What am I missing on the principles part?
