If you want to save money for your business there are plenty of legitimate ways to save money on taxes. Unfortunately, some business owners I know have tried to cut their tax bills by doing illegitimate things. These people are dumb. Don’t be dumb like them. Sleep soundly. Don’t do these five things.
1. Not Pay
Really? You’re just not going to pay? And you think that’s a good idea? One client of mine was going through some significant cash flow challenges so he withheld money from his employees’ paychecks and didn’t pay it into the IRS. Oh, and not only that, he skipped paying his estimated taxes during the year. Smart? What do you think? This was a very bad idea. Particularly with payroll, the client’s outside service filed quarterly returns, which are checked automatically by the IRS’ computers against their records and within just a few months of doing this, red flags were raised. For years, my client was battling the IRS to not only payback the amounts owed, but also the huge amounts of penalties and interest they slapped on him. Thanks to technology, not paying in your taxes – payroll or otherwise – is something that’s easily found by the tax authorities and will create enormous headaches down the road. Don’t do this.
2. Under-Value Your Inventory
Accounting lesson: If you’re like many businesses, 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 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. Oh, and then they’re dumb enough to change the way they value their inventory the next year (like changing that fifty cent valuation again) to also suit their tax purposes. Inventory is tempting to monkey with and the IRS knows this. Keep good records. Don’t write off inventory you haven’t sold (unless it’s really old and you’ve physically disposed of it). Most importantly: be consistent from one year to the next when you value your inventory. You know what? This is a good life lesson too: Be consistent in everything you do. You’re welcome.
3. Run Personal Expenses through Your Business
Hey, why not just run that dinner with the missus through the biz? Who’s gonna know, eh? It’s an oldie but a goodie and admittedly, it’s something that many of us are guilty of – sometimes unconsciously. Yet, it’s so easily discovered. Go on, you pretend you’re the auditor and just take a quick read of your general ledger and zero in on favorite accounts like “travel and entertainment” or “office supplies.” Boom! There you have it: that family vacation or wide screen TV for the living room charged through the business. Even if running your personal expenses through your business is done inadvertently, make sure someone is combing through your records at year-end just to check, OK? Remember – it’s not just about the dollar amount. If the IRS finds many instances of this it smells of fraud and breaks down your credibility. That piece of jewelry you bought for your significant other might just cost you ten times the original price.
4. Forget to Record Revenues
Ever go to those little family owned restaurants that don’t accept credit cards? Is it just to save on fees? Maybe. But let’s not kid ourselves. For many I know it’s also their attempt to avoid taxes. In a cash business, it’s easy to hide revenues, right? Maybe for some. But c’mon – take any IRS auditor with a fourth grade education and have him sit for a few nights at the restaurant. Do you think he will come up with a decent estimate of the takings? Of course he will. And if his estimates are significantly off from what’s being reported there will be more trouble for the restaurant owner than a mouse under the sink. 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.
5. Falsify Records
OK, now this is some hardcore stuff. This is when you whip out the “white out” and actually change supplier records to show higher costs or change your own invoices to reflect lower sales. This is bad, bad, bad. This is not an innocent mistake. If you’re doing this then you’re willfully evading taxes, which means that you’re willing to give up 3-5 years of sleeping in your own bed for a new sleeping arrangement that involves a five square foot cell and a roommate named Buster. Oh, and he snores.
Over the years, I have met a few business owners that think they’re saving money on their taxes by doing dumb stuff like this. Many have been tempted to do some of these things. But hopefully you haven’t. Don’t. It’s not worth it.
Join writer and small business owner Gene Marks each Wednesday on the Small Biz Ahead podcast. You can also submit a question for Gene to answer on the podcast.