If you want to save money for your business, there are plenty of legitimate ways to save money on taxes. The idea is to be a “tax minimizer,” not a “tax evader.”
Tax minimizers sleep soundly; tax evaders take big risks that can cost them massively, writes Gene Marks and Ben Gran in the SmallBizAhead newsletter from The Hartford.
Want to avoid making dumb mistakes when trying to minimize your taxes? Don’t do these five things:
1. Decide not to pay
The authors relate the story of one client who was going through some significant cash flow challenges, so he withheld money from his employees’ paychecks and didn’t pay it into the IRS. To make matters worse, he skipped paying his estimated taxes during the year.
This was a very bad idea. Particularly when you are managing payroll and the automatic tax withholdings that go with that, it’s very hard to get away with skipping your required tax payments.
In this case, the client’s outside payroll processing service filed quarterly tax returns, which are checked automatically by the IRS computers against the client’s records. This isn’t rocket science; if you’re not actually paying your payroll taxes in the amounts that you should be, the IRS will catch on quickly.
Within just a few months of the client executing his shortsighted cash flow plan, red flags were raised at the IRS. As a result, for years, that client was battling the IRS to not only pay back the amounts that he owed, but also to pay the huge amounts of tax penalties and interest that the IRS slapped on him.
Thanks to technology, not paying your taxes — payroll or otherwise — is something that’s easily discovered by the tax authorities and will create enormous headaches down the road. Don’t do this.
As a side not, QuickBooks Assisted Payroll will take care of payroll taxes for you … the filing, withdrawing money from the bank account and payments to state and federal tax authorities. Contact us if you want this kind of amazing help and peace of mind.
2. Under-value your inventory
If you’re like many businesses that trade in merchandise, you don’t get to deduct your inventory as an expense until you sell it. So, the more inventory you have sitting on your books, the less expenses you have to deduct. Some business owners see this as an opportunity to save on taxes.
They buy inventory for a dollar, haven’t sold it yet, but say it’s only worth fifty cents at year-end so they can deduct half of it. What’s worse, they change the way they value their inventory the following year to suit their tax needs.
The IRS is well aware of this game. What you need to do is keep good records. Don’t write off inventory you haven’t sold (unless it’s really old and you’ve physically disposed of it). Also, make sure you’re consistent from one year to the next when you value your inventory.
3. Run personal expenses through the business
It’s not a good idea to pay for that nice dinner with the wife or husband through the business. It’s an oldie but a goodie and, admittedly, it’s something that many of us are guilty of — sometimes unconsciously, the authors of the article point out.
All an auditor has to do is take a quick look at your general ledger and zero in on favorite accounts like “travel and entertainment” or “office supplies.” Those are typical places where personal expenses charged to the business show up plain as day.
Even if running your personal expenses through your business is done inadvertently, make sure someone is combing through your records at year-end. If the IRS finds many instances of this, it smells of fraud and breaks down your credibility.
4. Forget to record revenues
Have you ever been to those little family-owned restaurants that don’t accept credit cards? Are the owners just trying to save money on transaction fees? Could be. But it’s also possible that small businesses owners operating “cash only” establishments are trying to avoid taxes. In a cash business, it’s easy to hide revenues, right?
In reality, any IRS auditor who sits for a few nights at the restauran will come up with a decent estimate of the revenue the place earns. if his estimates are significantly off from what’s being reported, there will be plenty of trouble for the restaurant owner. Don’t be tempted to hide revenues … you may think you’re saving a few bucks on taxes, but it’s just too easy to find. Suspiciously low revenues are one of the biggest IRS tax audit triggers, according to the article.
5. Falsify records
This is blatant. Supplier records are actually changed to show higher costs or invoices are changed to show lower sales. Anyone who does this is willfully evading taxes, which could result in a sentence of 3-5 years if convicted.
It’s not worth it to try to save money on taxes by doing any of these things. And besides, the new 2018 tax law is giving small business owners that operate as pass-through entities a 20% business income deduction.
People make mistakes, people misunderstand the rules, and sometimes people get too aggressive in claiming deductions or classifying expenses in a way that bends the truth — but don’t deliberately evade your taxes. The upsides of saving some money on taxes are far outweighed by the possible consequences of getting caught, the authors say.