Upstreaming Income

Upstreaming in its most basic form is shifting income from one tax year to the next. The best way to explain it is with a hypothetical example. Let’s say you own a dessert bar in Colorado. This desert bar sells two products: dessert drinks and cheesecake. In the first year your profits are in excess of $400,000. You decide that you would like to move to Nevada in order to reduce or eliminate business income tax. Business income is earned where a product or service is located or where an order is placed. Moving to Nevada therefore will not affect business tax. Answer: upstream income to a Nevada corporation.

Now we said that the dessert bar specializes in dessert drinks and dessert cheesecake. To make the numbers easy the dessert drinks are worth $200,000 and the cheesecakes are worth $200,000. In order to upstream the income to a Nevada Corporation you need to form a corporation in Nevada. Let’s call it Dessert Drink Royalty Corp. You will then start to invoice the dessert bar for royalties for desert drinks. The same could be done for the cheesecakes. All income is now transferred to Nevada.

Now let’s say that the company keeps growing. You now decide to open a Dessert Bar Royalties Management Corporation in Nevada. You can then assign it some kind of economic purpose. Let’s use the example of bookkeeping. This will allow you to legally invoice from the management company to other companies.

Once again you keep growing and decide to sell the products on the internet. This is more of a sidestream or division example. Now you can use the Dessert Bar Royalties Management Company to fund the internet company.

This simple example shows how a company can grow and create more profits. This is the most basic form of upstreaming.