Can value from labor provided to oneself be taxed?
This is called imputed income, which is generally not taxed in the US. The basis of the home is the cost of land and material. That's it.  Your time isn't added to basis. No different than if you spend 1000 hours in a soup kitchen. You deduct miles for your car and expenses you can document but you can't deduct your time.  Over 2 years, you could have a gain up to $500K per married couple and pay no tax. I've heard of handyman type people making a living this way untaxed.  They move into a fixer-upper, fix it up while living there, stay over two years and sell.  They can pocket $125k/yr tax free this way assuming they produce that much value in their fixing-up.  (Beware, though, that this will bite you in low social security payments in retirement!)
"I'm working on similar problem space. There seems to be some working ambiguity in this space - most focus seems to be on more complex cases of income like Dividends and Capital Gains.  The US seems to take a position of ""where the work was performed"" not ""where the work was paid"" for purposes of the FEIE. See this link. The Foreign Tax Credit(FTC) is applied (regardless of FEIE) based on taxes paid in the other Country. In the event you take the FEIE, you need to exclude that from the income possible to claim on the FTC. i.e. (TOTAL WAGES(X) - Excluded Income) There is a weird caveat on TOTAL WAGES(X) that says you can only apply the FTC to foreign-sourced income which means that potentially we are liable for the on-US-soil income at crazy rates.  See this link.. Upon which... there is probably not a good answer short of writing your congressperson." If it's a legitimate cost of doing business, it's as deductible as any other cost of doing business. (Reminder: be careful about the distinctions between employee and contractor; the IRS gets annoyed if you don't handle this correctly.) I've never heard of an employer offering this kind of arrangement before, so my  answer assumes there is no special tax treatment that I'm not aware of. Utilizing the clause is probably equivalent to exercising some of your options, selling the shares back to your employer at FMV, and then exercising more options with the proceeds. In this case if you exercise 7500 shares and sell them back at FMV, your proceeds would be 7500 x $5 = $37,500, with which you could exercise the remaining 12,500 options. The tax implications would be (1) short-term capital gains of 7500 x ($5 - $3) = $15,000 and (2) AMT income of 12,500 x ($5 - $3) = $25,000, assuming you don't sell the shares within the calendar year. But the US has a higher rate than any other OECD country. So you are still taxing profits from money that wasn't made in the US.  Obviously way more complicated, but it's pretty insane. It can be even worse for an individual. Oh, and imagine you'd like to start a sole propietorship overseas as a US citizen. You either renounce or have insane compliance costs. Here is a quote from the IRS website on this topic: You may be able to deduct premiums paid for medical and dental   insurance and qualified long-term care insurance for yourself, your   spouse, and your dependents. The insurance can also cover your child   who was under age 27 at the end of 2011, even if the child was not   your dependent. A child includes your son, daughter, stepchild,   adopted child, or foster child. A foster child is any child placed   with you by an authorized placement agency or by judgment, decree, or   other order of any court of competent jurisdiction. One of the following statements must be true. You were self-employed and had a net profit for the year reported on   Schedule C (Form 1040), Profit or Loss From Business; Schedule C-EZ   (Form 1040), Net Profit From Business; or Schedule F (Form 1040),   Profit or Loss From Farming. You were a partner with net earnings from self-employment for the year   reported on Schedule K-1 (Form 1065), Partner's Share of Income,   Deductions, Credits, etc., box 14, code A. You used one of the optional methods to figure your net earnings from   self-employment on Schedule SE. You received wages in 2011 from an S corporation in which you were a   more-than-2% shareholder. Health insurance premiums paid or reimbursed   by the S corporation are shown as wages on Form W-2, Wage and Tax   Statement. The insurance plan must be established, or considered to be   established as discussed in the following bullets, under your   business. For self-employed individuals filing a Schedule C, C-EZ, or F, a   policy can be either in the name of the business or in the name of the   individual. For partners, a policy can be either in the name of the partnership or   in the name of the partner. You can either pay the premiums yourself   or your partnership can pay them and report the premium amounts on   Schedule K-1 (Form 1065) as guaranteed payments to be included in your   gross income. However, if the policy is in your name and you pay the   premiums yourself, the partnership must reimburse you and report the   premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to   be included in your gross income. Otherwise, the insurance plan will   not be considered to be established under your business. For more-than-2% shareholders, a policy can be either in the name of   the S corporation or in the name of the shareholder. You can either   pay the premiums yourself or your S corporation can pay them and   report the premium amounts on Form W-2 as wages to be included in your   gross income. However, if the policy is in your name and you pay the   premiums yourself, the S corporation must reimburse you and report the   premium amounts on Form W-2 as wages to be included in your gross   income. Otherwise, the insurance plan will not be considered to be   established under your business. Medicare premiums you voluntarily pay to obtain insurance in your name   that is similar to qualifying private health insurance can be used to   figure the deduction. If you previously filed returns without using   Medicare premiums to figure the deduction, you can file timely amended   returns to refigure the deduction. For more information, see Form   1040X, Amended U.S. Individual Income Tax Return. Amounts paid for health insurance coverage from retirement plan   distributions that were nontaxable because you are a retired public   safety officer cannot be used to figure the deduction. Take the deduction on Form 1040, line 29. You are describing a corporation.  You can set up a corporation to perform business, but if you were using the money for any personal reasons the courts could Pierce the corporate veil and hold you personally liable.  Also, setting up a corporation for purely personal reasons is fraud. You tagged with S-Corp, so I assume that you have that tax status.  Under that situation, you don't get taxed on distributions regardless of what you call them.  You get taxed on the portion of the net income that is attributable to you through the Schedule K that the S-Corp should distribute to you when the S-Corp files its tax return.  You get taxed on that income whether or not it's distributed. If you also work for the small business, then you need to pay yourself a reasonable wage.  The amount that you distribute can be one factor in determining reasonableness.  That doesn't seem to be what you asked, but it is something to consider. Nope pay the employer back the due does not involve any tax. Just keep a record of the transaction so that its available as reference. "?  You quoted an oft cited oft disproven false factoid. It's extremely biased. Like you seem to be.   Most of those ""self made"", notice those quotes, people came from money. Their business is ""self made"", with family money. Like the article implies." I think you can. I went to Mexico for business and the company paid for it, so if you are self employed you should be able to expense it. Do you have any insight on average *effective* rates paid by SE owners?  As a counterpoint to your (very valid) links, filing as S-corp allows for taxes on distributions to be exempt from payroll tax and taxed at much lower rates. Also, being SE allows for various deductions not possible for wage earners. There's probably other examples not immediately coming to mind.  Also, SE taxes equal taxes otherwise paid by employer + employee. It's just that those employer taxes don't appear on the employee's paystub so not everyone realizes this. "In the UK, I could start my own business - either as a self-employed person, or by starting a company. With a company, the company might have £50,000 income, £5,000 cost, and pay me a £45,000 salary. In that case the company has no profit and pays no taxes, but I personally pay income tax. Or I could pay myself any salary I like, say £20,000 salary, so I pay tax on £25,000 profit and £20,000 salary. The state actually gets less money in total if I set my salary so the company makes a profit.  If I'm self employed, income minus cost is my profit and I pay taxes on that. If I don't make profit, I pay no tax. Unfortunately, I also wouldn't have any money to buy food, pay the rent, and so on and so on. I'd have the same income and pay the same taxes as someone who is unemployed.  There are ""businesses"" that are just run for the enjoyment of the owner and don't make profit. Rich guy buys a farm and starts breeding race horses, that kind of thing. In that case, there is zero difference between a guy breeding race horses and calling it a ""business"" and another guy breeding race horses and calling it a hobby. Neither makes money and neither pays taxes." In the current economy there is no upside to working for yourself.  Get in a salaried position as soon as you can, and sacrifice to whatever gods you worship that you don't get made redundant. If you're already working for yourself, and wouldn't give it up for anything, hire someone, and get them off the street. "You are confusing entirely unrelated things. First the ""profit distribution"" issue with Bob's S-Corp which is in fact tax evasion and will probably trigger a very nasty audit. Generally, if you're the sole employee of your own S-Corp, and the whole S-Corp income is from your own personal services, as defined by the IRS - there's no profit there. All the net income from such a S-Corp is subject to SE tax, either through payroll or through your K-1. Claiming anything else would be lying and IRS is notorious for going after people doing that. Second - the reclassification issue. The reason employers classify employees as contractors is to avoid payroll taxes (which the IRS gets through Bob's S-Corp, so it doesn't care) and providing benefits (that is Bob's problem, not the IRS). So in the scenario above, the IRS wouldn't care whose employee Bob is since Bob's S-Corp would have to pay all the same payroll taxes. The reclassification is an issue when employees are abused. See examples of Fedex drivers, where they're classified as contractors and are not getting any benefits, spend their own money on the truck and maintenance, etc. The employees are the ones who sued for reclassification, but in this case the IRS would be interested as well since a huge chunk of payroll taxes was not paid (driver's net is after car maintenance and payments, not before as it would be if he was salaried). So in your scenario reclassification is not as much a concern to Bob as his tax evasion scheme claiming earnings from performing personal services as ""profits from S-Corp"". A precedent to look at, as I mentioned elsewhere, would be the Watson v Commissioner case." "You mean to tell me that everyone doesn't pay his/her fair share?!  Please say it isn't so. :) Therein lies the welfare state:  Tax the rich more heavily to subsidize the poor, and hobble the rich's ability to do so on their own accord. In any case, though, in the United States, if you make any money whatsoever, that usually counts as income, and can hence be taxed.  Here's the IRS' definition of gross income.  Pretty all-inclusive, isn't it? Businesses are allowed to deduct expenses to count against their income, but if one has more expenses than income year after year, (a) this is the road to financial ruin, and (b) the IRS puts an end to the tax losses after enough years of failing to show a profit. So, sure, if a businessperson doesn't have any income, then they're technically using the roads, etc., ""for free,"" but unless the businessperson wants to live off the land and the kindness of strangers, he'd better turn a profit eventually.  Then he'll be taxed."