Business - You can avoid taxes (legally)

           Can you avoid taxes – Yes, is it legal.

Yes you can avoid tax it is legal but however evasion of tax is illegal.

The US income tax system is based on voluntary compliance. Under US tax laws it is taxpayer’s responsibility to report all the income. Let’s understand the concept of tax avoidance and tax evasion under this concept.

Tax avoidance is planning your taxes in such a way that you pay minimum or do not pay at all by taking an action to lessen your tax liability and maximizing after tax (take home) income.

Tax evasion in the other hand is failure to pay or a deliberate underpayment of taxes by hiding your income or inflating you expenses or intentionally presenting incorrect information or not reporting the income or other information that are required to report under the law. Tax evasion is criminal offence.

How do you avoid taxes?

US Tax laws has provided various tax provision to lower one’s taxes under the law either you are corporation, trust, individual or any type of taxable entities.

Here are few simple tips to lower or defer your taxes (Overview)

1. Business Structure planning

Selection of business structure has a big bearing on tax and legality of a business. There are various tax structures a business can choose from. Adoption of structure depends on the financial goal and the value of the organization including tax planning. For some business S-Corp would be best, and for some; partnership and C-Corp is the best choice for other who would like to go big and attract more investors. Also C-Corp may be good for those people with high income who do not want to pass these incomes to higher personal tax rate. It a matter of analysis by an expert.  Only a tax expert by analyzing the current situation and looking at future plan of the business can determine a best structure. Also depending on the growth and value structure can change anytime as required.

2. Keeping proper record of you income and expense

Business should have a proper accounting system so that it is always easy to check on income and expenses for a particular period of time. This will give a room for planning for the current year and future too. A good bookkeeping shows where the business stands and what can be done to lower taxes. Without a proper record keeping, it is impossible to plan on anything.

3. Deferred income

With the proper books and record, there is a possibility to defer income to future years. This will some time reduce or illuminate tax if planned properly. There are businesses who collects money in the year but it takes a while to provide goods or service to the customer, there comes a concept of deferred income.

4. Take advantage of home office, Augusta rule, auto mileage, etc.

There are provisions in the tax laws that give permission to a business to take advantage of some deductions that do not look obvious.  Small business owners most of the time misses this deduction as they think they are using their home and automobile even before they have started the business so these expenses are personal and have nothing to do with business, but once you started your business you may be able to take advantage of those deductions. Please consult a tax professional on how to go about it. It can be a game changer sometime.

5. Real Estate tax planning

Real estate is a big deal on planning taxes. If you are managing your real estate, you might be able to deduct all the losses from your rentals. No one invest in real estate for loss but due to depreciation and other book expenses, rental real estate generally creates book loss and that you may be able to deduct from your income and save a bunch of tax. However, you have to manage it by yourself or your spouse can also do it. There are some rules you need to adhere to for considering yourself as real estate professional though.

6. Taking business credits like research credit, Work Opportunity credit, energy Credit, New Market credit and much more.

There are various business credits a business can claim that are always overlooked by the new business or even those who are in business for a long time. Reaching out to an expert will help you find all the credits and get you most out of it. There are tons of business credits you can take, and lower your taxes. Research credit is one of them. Research is the pivot of any business. Research is indispensable with business. Please check if your CPA told you or tried to do the assessment for you, if you qualify.

7. Retirement Accounts. MSA, HSA

Retirement account for the owner as well to the employees can be deducted from business income that will have two fold impacts. One is deduction as expense that lowers your taxes and other is retirement benefits help retaining the employees for longer term. In case of partnership or no-employee business, there can be larger amount of retirement deduction owner can avail. Also HSA, MSA, and likewise account can be good choices.

8. Change in method of accounting

Method of accounting can also have bearings on the taxes. This can spread tax across the years, or sometimes in case of S-corp. or partnership can lower taxes by spreading income to different years. Therefore accounting method should be selected by analyzing the receivable collection period of the business and the nature of accrual of the expenses. There are businesses that collect their payments at the point of sale and there are some that collect long after the sale. Discounts, rebates, refunds, returns, etc. will also have bearing on accounting methods. Like in Construction industry, invoices are collected a series of payments and the method of accounting will have a big impact on income and taxes both.

9. Short term rentals

Short term rentals are considered as business (like a hotel business), so they are not under passive activity loss limitation. It is good to have a good plan on it. if you are in a place where you have tourist and people would love to rent your home for short period you can go for it. One catch is it should be 7 days or less days rented at a time in average. Also there 30 days rule if services are provided to the guests. Airbnb is an example of the short rental. However, it is not that complicated once you have good person to walk though this process.

10. Self Rentals

Taxpayers engaged in self rental activities can implement a grouping election to pair the self-rental activity with the operating entity. Grouping allows taxpayers to combine what would be passive loss from a self-rental entity with income from an operating entity, so it can be beneficial.  Rental activities can be grouped with other activities if they constitute an appropriate economic unit and the rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity or each owner of the trade or business activity has the same proportionate ownership interest in the rental activity.

11. Planning on depreciation and write off

Planning on depreciation, write off can be a great deal of tax saving. Timing of asset acquisition is very crucial. Please consult your CPA if you are planning do major investment to your business especially in the final quarter of the year.

12. Cost Segregation

Cost segregation can save to bunch of taxes on your rental property. However in long haul the segregation will have no real impact, but for short term it will give you bigger tax deduction. All the cost segregation have not the same level of benefit, the benefit depends on the current income and the future income of the tax payer. Saving of 10% tax rate in current rate does not make sense if you are up for on 37% tax rate within couple of years. So please consult your CPA to find out if you will be benefited by spending money in cost segregation.

13. Investing on Qualified Opportunity Fund/Zone

This is great opportunity for high income earners. You can defer business or personal capital gains you invest in a Qualified Opportunity Fund. It has two fold effects one is you save tax when you invest in the fund and if you hold the investment for 10 years you will pay no tax on the gain. It is a complex process so you need an expert to run you though the process.

14. Oil and Gas investments

There are few tax advantages of investing in oil and gas. There is a huge deduction of expenses like Intangible drilling cost that you can deduct fully in the year. Tangible drilling can be written off in 7 years; also you can deduct depletion cost even after your cost basis has been fully recovered.

15. Investment in Tax exempt instruments

There are tax exempt investment vehicle in the market like Municipal bonds, Tax Exempt ETF, Tax Exempt Mutual Funds, etc. You are investing in them and make some income without paying taxes.

16. Donations

Donation is also one of the tax saving tools for business and individuals. Corporation (C-corp.) can deduct donation to eligible charitable organization up to 10% of its income. Individuals can take benefit of donor advised fund to take a bigger deduction in the current year of donation.

17. Spending on business expansion

Business expansion can be a good way to grow business and write off expenses or amortize it. Paying dividend may sound attractive but expansion saves taxes and market value of the company go up.

18. Paying Estimated taxes on time

Paying estimated taxes will illuminate the penalty and interest on late payment or nonpayment. That can be huge if the income is in higher side. Small liabilities can accumulate to make it bigger, so taking care of estimated tax also help you reduce your tax burden and affect your cash flow.

19. Filing Returns and paying taxes on time

Filing taxes on time is very important to reduce your penalty and interest. That can go even to two digits. It is sometime much expensive than borrowing money from the bank.

Please consult a CPA or a tax professional to learn more about tax saving tools and provisions. The above are just high level presentation of some tax planning. They are not suggestions or recommendation. They are presented for information and learning purposes only.

Wish you all the best of luck in your tax planning journey !