The Basics of Upstreaming Income

<p> The simplest way to define upstreaming is shifting income from one tax year to the next.  The best way to explain it is with an example.  Let’s say you own a coffee shop in South Carolina.  This coffee shop sells two products coffee and pastries.  Your first year you are very successful and your profits are $600,000.  Now that you are making all of this money, you decide that you would like to move to Nevada in order to reduce or eliminate business income tax.  They problem with this is that business income is earned where a product or service is located or where an order is placed.  Therefore, moving to Nevada will not lower your tax burden.  So how can we keep more of our hard earned money?  Answer: upstream income to a Nevada corporation. <p/>

<p> We stated earlier that the coffee shop specializes in coffee and pastries.  Let’s just simplify the example and say that the coffee sales are $300,000 and the pastries are worth $300,000.  You now take the first step and set up a corporation in Nevada.  Let’s call it Coffee Royalty Corp.  You will then start to invoice the coffee shop for royalties for the coffee you sell.  This can also be done for the pastries.  All of your income is now transferred to Nevada. <p/>

<p> Now at this point hopefully your company flourishes and keeps growing.  You now decide to open a Coffee Shop Royalties Management Corporation in Nevada.  You then assign it some kind of economic purpose.  An easy example is bookkeeping.  This will provide you with a legal way to invoice from the management company to other companies. <p/>

<p> Once again your business keeps growing and you decide to take the next step.  This is to sell your products on the internet in order to reach more consumers.  This is more of a sidestream or division example.  Now you can use the Coffee Shop Royalties Management Company to fund the internet company. <p/>