Being profitable is a major goal for any business. Many people who’ve never run a business may not realize how challenging it can be to make a profit because, though they may see how much revenue can be generated, they rarely understand how much it costs to operate a business. And, while there are many legitimate costs in running a business, some business owners or managers sometimes attempt to count things as expenses when they aren’t allowed. The difference between an illegitimate and a legitimate business expense is important as it can cost more in penalties and fines later and possibly even lead to jail time if it’s serious enough. The difference between the two is tax avoidance and tax evasion, the former being legal and the latter being illegal.

Tax Avoidance utilizes the legal forms of deductions, credits, and other strategies within the framework of the law. This includes contributing to retirement accounts, investing in tax-advantaged accounts, accelerated depreciation, utilizing established tax credits, and other opportunities and incentives established by federal, state, or local governments.

Tax Evasion involves deliberately misrepresenting or concealing information to reduce tax liability. This could include underreporting income, inflating or misrepresenting deductions, or hiding money in offshore accounts. Sometimes this is done unintentionally such as deducting more than the legal limits for gifts. Other times it’s deliberate such as charging personal expenses to the company.

What often happens is that a mistake is made and the owner realizes it later and feels like it’s acceptable because they got away with it. This may then turn into a habit or even escalate. If that happens, the chances increase greatly that it will trigger an audit and they’ll get caught. If (or when) this happens, the benefits and feeling of getting away with it disappear very quickly with the aggravation and time as well as the money that it costs to correct the issues. Instead of getting caught, the smarter course of action is to recognize what happened and make adjustments to the accounting. This may involve filing amended tax returns or making other changes, but these are better than the alternative of getting caught breaking the law.

There are a great many ways to legally use tax avoidance to decrease your company’s tax burdens and to benefit both the individuals and the company itself. This is why it helps to work with experts to not only review your past actions, but to also create a strategic plan to reduce your taxable income while providing financial benefits for the business, employees, and owners. Brightleaf loves to help small business plan for the future and to help make corrections if mistakes were made in the past. Reach out to us to see how we can help your business!