Multiple businesses question

[quidproquo]

This is kind of an odd question but I'll try to explain it as clearly as possible.

Basically what I want to do is have one business, we'll call it company A sell advertising to company B that I would also own. Company A can get advertising at a discounted rate say 80% off normal price through a marketplace. If company B is buying it at the normal price, how would the taxes work for both companies? I'm seeing this as a win win if the advertising was profitable for company B while I would still profit at company A from selling the advertising at full price.

Would there be a certain business structure that would be beneficial if this is something I'd like to pursue? Just trying to get some advice from others that may have some experience in selling services from one business you own to another that you also own.

 

[Smidge]

It is only advantageous in a situation where the marginal taxes paid by B are higher than A, and if the advertising expenses are tax deductible.

For example, if Company A pays 20% tax and Company B pays 30% tax, you have an incentive to get more deductible expenses into Company B. however, your incremental savings are only 10% of the tax benefit of the 20% discount on advertising that Company A realizes. For this scenario, it saves you and additional 0.6% on your marketing expenditures. Congrats! Unfortunately, you will now need to pay an accountant a bunch more to balance everything out at year end for all of your companies. This is because your non-arms length transactions are a red flag that will make you a target for future audit.

Given that the above scenario is only really feasible if you have some wonky offshore corporations that are also doing business with other international organizations, I would suggest that it might be best to pay the man his due and focus on your core business model.

 

[quidproquo]

It is only advantageous in a situation where the marginal taxes paid by B are higher than A, and if the advertising expenses are tax deductible.

For example, if Company A pays 20% tax and Company B pays 30% tax, you have an incentive to get more deductible expenses into Company B. however, your incremental savings are only 10% of the tax benefit of the 20% discount on advertising that Company A realizes. For this scenario, it saves you and additional 0.6% on your marketing expenditures. Congrats! Unfortunately, you will now need to pay an accountant a bunch more to balance everything out at year end for all of your companies. This is because your non-arms length transactions are a red flag that will make you a target for future audit.

Given that the above scenario is only really feasible if you have some wonky offshore corporations that are also doing business with other international organizations, I would suggest that it might be best to pay the man his due and focus on your core business model.

Thanks for the reply, I'll just stick to one company.