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And finance Allah Shmoop What is conduit theory Old All

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right people If you try really really hard you can

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do it Sorry you couldn't resist Okay So here's a

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conduit Yeah Fancy five dollar word for pipe A different

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kind of pipe Yeah they're okay Conduit theory relates to

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the tax treatment of an investment company Well the basic

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idea is that if the company passes ninety percent or

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more of its net income gains and so on through

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a figurative conduit then well then that money that ninety

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percent passed through won't be taxed on the income of

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the corporation That is The company won't be first taxed

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when it earns that income Only to then have the

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recipients of those cash distributions be taxed again Instead the

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income and losses if any will be passed to the

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investor or slash owners of that company And those shareholders

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will then be taxed as individuals or in whatever vehicle

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through which they invested in the company All right example

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brass knuckles ink made fifty million dollars This year it's

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going to keep five million dollars and just add to

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the twelve million it already has in the bank You

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know rainy day money but it's going to pass through

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via the Conduit Theory system forty five million dollars to

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its shareholders I eat ninety percent of its fifty mil

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in profits so the company will be tax and say

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thirty percent on the five million it's going to keep

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or it'll pay one point five million in taxes and

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keep a net three point five million dollars for that

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rainy day fund But then it'll pass through the forty

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five million to it's conveniently numbered forty five shareholders who

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all own an equal amount of brass knuckles ink Well

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then each shareholder gets a million box on which they

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would then be taxed as individuals This system of conduit

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profits to the owners is the opposite of what happens

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in many corporations Were taxes are paid twice once on

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the earnings of the corporation and then again after earnings

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have been passed on to shareholders usually in the form

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of a dividend Well in this case had brass knuckles

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not adopted conduit theory for tax purposes it would've paid

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fifteen million dollars in taxes on the fifty million a

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taxable profits to net thirty five million which would then

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be contained or retained in the company then presumably at

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some later date and years down the road had the

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company then distributed that money to shareholders Shareholders would then

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again be taxed and they'll say thirty percent long term

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gain raids or something like that so that the thirty

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five mill would have been boiled down to something closer

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to just twenty five million net after the massive tax

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hits had you know hit So put that in your 00:02:43.97 --> [endTime] conduit in smoke it Whoa

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