Though you may not realize it, there is a way for you to legally save some money on your taxes. Of course, there are some illegal methods of saving money in this area, as well, but these are of course unethical and quite risky. If you are caught cheating on your taxes you could face hefty punishment.
It is important for you to be able to distinguish between the practices of tax avoidance and tax evasion. Tax avoidance is a perfectly legit way to lower how much you pay in business taxes every year, and it is actually an encouraged method of saving money on your taxes. Tax evasion, on the other hand, is not permitted by law. You commit tax evasion when you avoid paying your owed tax liability.
Tax avoidance is actually a relatively common practice among business entities. Though the name may appear to be a bit misleading, it is actually perfectly legit and even encouraged by the United States government. Through tax avoidance, you don’t completely skip out of paying all of your business taxes; instead, you capitalize on the various deductions and loopholes available.
There are several ways that you can carry out tax avoidance. Many companies opt to invest chunks of their money in municipal bonds, which are not taxable. Depending on how much money they choose to invest, they may be able to reduce their taxes significantly. Another common tactic is to form a separate entity in an offshore jurisdiction, where corporate taxes are not applied.
Finally, owners of the company can avoid taxes by donating all of their personal assets to the business. Because the corporation owns all of the money you make, you will not be subject to the affiliated personal taxes. They may still have to pay corporate taxes, however.
You should be aware of what tax evasion is, so that you don’t accidentally engage in this illegal practice in your efforts to lower your taxes. This is actually considered to be a form of fraud, so even if you save a lot of money when you start off, when you are caught you will face face high fines and years in federal prison. You commit tax evasion when you purposefully avoid, without the presence of a loophole, paying your tax obligations – either personal or corporate, or both.