One of the more important strategies for a business to employ is called tax liability minimization. However, it is essential that you know what you are doing when undertaking this task. The federal government has very strict requirements for businesses paying taxes. You need to follow these rules carefully or you may face legal trouble. There are things you can do to minimize how many taxes your business owes, but some strategies are legal and some are not.
Tax Liability Minimization Vs. Avoidance
The difference between tax liability minimization and tax liability avoidance is that the latter is illegal. The most common method of tax avoidance is to not report all your income. If it appears that your business made less than it did, you do not need to pay as much in taxes. Instead, you will only pay taxes on the amount your business did earn, and you can pocket the rest. To be perfectly clear, this is tax fraud and many people go to prison every year for doing exactly this. Another form of illegal tax liability avoidance comes in the form of claiming deductions that you are not eligible for.
Tax liability minimization, on the other hand, is perfectly legal. There are some strategies you can employ that reduce how much you owe without being dishonest or breaking any laws.
Methods of Tax Liability Minimization
Here are the most common forms of legal tax liability minimization:
- Increase Employee Benefits – Paying into employee benefits, such as retirement plans or healthcare, reduces your total gross income. This means the amount you are taxed on is reduced. Make sure you keep careful records of where every dollar goes and report it to the IRS accurately.
- Charity Donations – If you contribute a large amount to the right charities, you can receive sizable tax deductions. As added bonuses, you can do a lot of real good in the world and improve the reputation your business has at the same time.
- Transition Non-Qualified Investments – This one is a little hard to understand unless you already know how it works. Essentially, dividends and interest are not taxed by the federal government and sometimes state government. This means you can carefully transition your investments to reduce your tax liability as much as possible.
Because this is such an important matter, it is a very good idea to hire a business tax accountant or attorney, to handle this. You can still get in serious trouble even if you break a tax law accidentally.