5 Really Dumb Ways to Save Money On Your Taxes

Gene Marks and Ben Gran

[This article has been updated to reflect the new tax law that went into effect on January 1, 2018]

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. Be a tax minimizer, not a tax evader. Tax minimizers sleep soundly; tax evaders take big risks that can cost them massively.

Want to avoid making dumb mistakes when trying to minimize your taxes? Don’t do these five things:

1. Not Pay

Really? You’re just not going to pay your taxes? 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 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 is going to find out, and fast. Within just a few months of my client doing his shortsighted cash flow scheme, red flags were raised at the IRS. As a result, for years, my 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 in 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.

2. Under-Value Your Inventory

Accounting lesson: 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. 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 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.

Under the new tax law that took effect on Jan. 1, 2018, there are some changes that offer simplified accounting options for small businesses with average annual gross receipts of under $25 million (this amount will be indexed for inflation after 2018). More businesses are eligible to use the cash accounting method under the new law, and will not be required to account for inventories under Section 471.

Talk with your accountant to see if changing your accounting method is a viable strategy for your business. But, whichever accounting method you use, inventory accounting can be complicated, but ignorance is not an excuse; the IRS will hold you accountable for what’s on your tax return.

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 small businesses I know, operating as “cash only” establishments is 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. Suspiciously low revenues are one of the biggest IRS tax audit triggers.

5. Falsify Records

OK, now this is some hard-core 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 three to five 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 who 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. And besides, the new 2018 tax law is giving small business owners that operate as pass-through entities a 20% business income deduction. Are you sure you want to cheat on your taxes when there’s already a nice tax break built into the system?

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.

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 or leave a comment below.

38 Responses to "5 Really Dumb Ways to Save Money On Your Taxes"

    • Garen Miller | March 21, 2017 at 1:10 pm

      Oh, and your car, don’t forget about your car that is supposed to be the car used only for business travel that goes on vacation. I watched a friend register every car he owned as belonging to the business and then get pulled over the coals by the IRS over deducting automobiles. Great article by the way!

    • David McIntire | March 21, 2017 at 2:06 pm

      All very good advise. If you can’t operate your business correctly, then it’s time to get out and work for someone who can.

    • Valerie Smith | March 21, 2017 at 2:19 pm

      I’m a tiny little business that does mostly farmers markets, but this advice is good and entertaining.
      SO funny in fact, I read the whole thing! Thank You!

    • Richard Royston | March 22, 2017 at 4:05 pm

      And don’t forget that if you ever want to sell your business or claim lost business earnings in a lawsuit, your tax returns will provide the best historical record of how your business has been doing. Understated income, overstated expenses and all.

    • Rebecca Cooper | March 22, 2019 at 10:06 am

      Also, if you apply for a loan or credit, your income tax returns will be a basis for determining your income and ability to pay back the loan.

    • Lisa Peterson | March 22, 2019 at 11:52 am

      Good examples of what not to do, but quite a snarky, repetitive and condenscending-toned article. Leaving the humor but using a different tone would have made it informative AND professional.

    • Robert William | March 24, 2019 at 2:36 pm

      Excellent 5 Points
      I would add a smaller suggestion…. If one is doing their own taxes to save money, get some lower cost advice from a “good old” accountant (and I mean experienced) to review how you are doing things. My CPA charges $300 per hour. My accounting advisor charges less than $50 per hour. I still use the CPA for the final, but many times I find my “good old” accountant more helpful.

      • Hannah Sullivan | March 25, 2019 at 8:42 am

        Great advice, Robert!

    • Naseem Mays | March 26, 2019 at 11:02 am

      Funny and even though it may seem obvious I am sure a lot of people needed this reminder. You never save money cutting corners. Questionable accountants often try to share their “secrets” with you in order to gain your business. Reputable accountants will do their job with care and accuracy (and probably a higher price point). Generally, you get what you pay for in that sense. The IRS will find whatever you are trying to hide whether its tomorrow or in 3 years from now. Tap into your resources, get a second opinion and do your homework. Also, someone should really create a platform where clients can review their Financial Professionals.

    • Victoria Lundquist | March 27, 2019 at 3:43 am

      Thank you!!

    • pat | March 27, 2019 at 5:26 am

      I have an investor friend who took high interest loans on properties that needed rehab but then generated high rental incomes. Then he decided to refinance once these loans hit $208,000. But over the years he didn’t show enough rental income on his Schedule E to justify the conventional refinance. So as requested by the financier he decided to show the true rental incomes for 2 years to qualify for the refinance. He awoke the wrath of the IRS so a refinance was the least of his problems.

    • Shari L Olson | March 27, 2019 at 9:09 am

      I enjoy reading these little tidbits as I have a bookkeeping/payroll business of my own. I have had accounts on both sides of the spectrum of these 5 tips. I try to give all my clients the correct way to do things so that they do not have to worry about the IRS, but sometimes they do not listen and like to do what they want. Not a good feeling if you are doing the books for them.

    • Mary Feigen | March 27, 2019 at 9:34 am

      Great advice. Thank you

      • Hannah Sullivan | March 27, 2019 at 12:37 pm

        Thanks for reading, Mary!

    • John | March 27, 2019 at 10:02 am

      I was recently offered to buy a partner’s share in a shop that supposedly makes a lot of money. I asked the remaining partner why not get an SBA loan and buy his departing partner’s share. He said because the books don’t show a profit thus the business does not qualify for a loan! The shop gives ‘cash discounts’ to clients and the owners take the cash home to keep it off the books. Not only does this disqualify the business from bank loans, but also severely affects the value of the business when its time to sell. Not to mention of course that the owners can go to jail for tax evasion! I told them I wouldn’t get involved in such business no mater how much money it makes.
      Unfortunately I know a few people who do shady things like that. For example, few handymen, tree trimmers, etc I hired who asked for cash instead of check.
      I also know a.Real Estate investor who routinely uses his business credit card for non-business dinners, deducts many other personal expenses, buys personal stuff under the business, and leases expensive cars using the business name as well. I’d send him a copy of this article if I thought it would help!

    • Alexis Claire | March 27, 2019 at 10:30 am

      I second Lisa Peterson’s sentiments. The snarky condescending undertone is in poor taste and juvenile, especially for a b2b.

    • Timothy W Frost | March 27, 2019 at 10:33 am

      When I was a child my now-deceased uncle ran a TV repair business as a side job out of his home. He would take calls from customers and then visit their homes to do the repair, if possible, and if the job required a difficult repair, he would bring the TV to his home and work on it there. He deducted 100% of his automotive expenses even though he used his car as their family car. I’m not sure if he even filed any business tax returns at all. Since I was so young when he was doing this I only overheard things here and there from my father and mother’s comments about him and his business practices. Ever since I opened my business as a retirement activity, I have been under the watchful eye of my CPA who prepares my personal and business taxes for me. I attended a class given by a local university and conducted by a business professor who is also an attorney. The cost of that course was…$35.00!!!! And I consider it to be the best $35.00 I ever spent in my life. I strongly suggest that all current and prospective small business owners seek out and take such a course even if it costs 10 times as much.

    • HENRY N RODRIGUEZ-ALMANZAR | March 27, 2019 at 10:35 am

      And don’t forget that if you ever want to use your home as a business operations, don’t try to put all the house expenses on the business because only small percent of it will be responsibilities of your business. Consult you accountant to find out which part will be your personal responsibility.

      Extremely good article, I really enjoy it while reading.

      Thank you very much.

    • Maricarmen Carrera | March 27, 2019 at 11:31 am

      I do bookkeeping and have a client I know he is sheeting on payroll taxes, in fact he is actually not reporting payroll or contracting labor expenses, he pays in “cash” to his employees/contractors…. my question is if I am responsible before the IRS sending 941 payroll tax with only one employee that received one or two paychecks in three months?

      If this is the case, I will stop working on his accounting right away!

    • J R Jammes | March 27, 2019 at 1:16 pm

      Thank you for the article. Although most of these items to avoid the IRS’s wrath should fall under the heading of “common sense” for business owners, it is good for us all to get a reminder now and then of the “Do’s and Don’ts” in business. I also like the satirical writing used; it gives us a chance to grin, and still understand the concept presented. I do not, like Lisa Peterson and Alexis Claire, see any snarkiness, only satire.

    • Naseem Mays | March 27, 2019 at 1:27 pm

      If you are under power of attorney you could be held responsible, but once the IRS finds out money may be owed they will conduct an audited and your client will be fined whatever penalties and/or amounts are due to them based on the findings. As a professional though it is always best to keep to GAAP to avoid any issues legal or detrimental to your reputation.

    • Tracey | March 27, 2019 at 1:49 pm

      Response to Maricarmen…if you fill out 941’s, you should review the signature page that contains a “penalty of perjury” clause. Of course you are responsible if you assist anyone to falsify information to the IRS. Fair warning to bookkeepers, no client is worth going to jail over!!! Good article by the way…sometimes it takes a sarcastic tone to get people’s attention.

    • Tom Alciere | March 27, 2019 at 2:48 pm

      Response to Lisa Peterson: The trade-off is that if it is written with less humor it becomes boring and fewer people will read all the way through it.

    • Gene C. Burgess | March 28, 2019 at 4:10 am

      Sir – Excellent Advise. Well Written. May I add – KNOW your accountant. This year when I met with my accountant, Les MacBay, to file my taxes, I told him that we had a payment made with cash and was not sure how Gayle. My office manager, had listed it. He told me he would NOT do my taxes if I did not claim that money. That Payment WAS ALREADY in the accountants copy of QuickBooks, but my respect for him went up and my personal accountability – to do the right thing – was backed by his character. An honest accountant is a blessing. Every year when I sign my tax return I feel like I lie. There is a line which reads – something like this – YOU HAVE EXAMINED THESE DOCUMENTS AND KNOW THEY ARE CORRECT. Sorry, but I could examine them for 3 weeks and not know. Gayle my office manager gives all the numbers to my accountant…They tell me what to send in 🙂 Simple enough if you have honest people working for you – who know the rules. Keep encouraging good Character. Blessings. Gene

      • Hannah Sullivan | March 28, 2019 at 8:32 am

        Thank you Gene for this great advice!

    • Elizabeth | March 28, 2019 at 7:04 am

      Great article. And for those who think there is a condescending tone—-get over it. It’s written like that on purpose to reflect how people think when trying to outsmart the IRS. I think it’s well written and informative! 👏

      • Hannah Sullivan | March 28, 2019 at 8:31 am

        Thanks for reading, Elizabeth!

    • Sherman Stenson | March 28, 2019 at 10:30 am

      Our younger son is majoring in Computer Science with a specialty in Cybersecurity and Cyberwarfare. He’s been told by a professor who does outside consulting that the IRS is on the verge of having artificial intelligence that will automatically comb through tax returns and basically do a “sniff test” looking at a lot of KPI’s and ratios as a reality check, including looking at comparable businesses in the industry and geographical area. Any returns that seem “off” will get deeper scrutiny for a potential audit. It’s been trending that way for years, but is now on the cusp of a breakthrough that will make cheating exponentially more difficult. It’s just not worth trying to game your taxes. If we’re making a profit, we should pay our legal share. I also agree with what others have said about under-reporting income and over-stating expenses: It’s just going to make it more difficult to obtain capital for expansion or cash-flow emergencies, and make the business attractive to future buyers. Stupid all around. If organized crime and drug kingpins don’t scare the IRS, does anyone think their neighborhood dry cleaning business or doughnut shop is going to get away with anything?

    • REBECCA MUSSER | March 28, 2019 at 6:57 pm

      This article is a good reminder for ethical reporting practices, intentionally or inadvertently. IRS auditors only see the error. They cannot judge intent. I think the default conclusion is probably that the error or omission was fraudulent. So, thank you for the encouragement to due diligence.

    • Tim Frost | March 29, 2019 at 8:52 am

      The IRS going to use AI to check returns? Give me a break. I worked for SSA for 32 years as a computer programmer. When I first arrived there in 1978 I was told that we (SSA) were receiving and processing all incoming tax information because the IRS was YEARS BEHIND in processing this data and THEY were holding us up. A few years later I learned that the IRS had spend approximately $15,000,000.00 on a project to improve their automated processing of tax returns. The result of that effort was that they ended up with 0 (yes, that is ZERO) lines of executable code in their new system. Although I retired in 2004 from SSA I seriously doubt that things have changed that much at the IRS in the modernization of their processing of tax returns. I’ll believe it when I see it. Until then, I still believe that the IRS is more akin to the Keystone Kops rather than the modern, effective agency that it needs to be.

    • Sanjay Agrawal | March 30, 2019 at 10:07 pm

      Most small business owners report on “cash basis” which means sales is not reported as revenue until translated in to cash. However, similar treatment is required for payables. One way to get around this is to pay bills that are not due during current year.

    • Linda Camarda | March 31, 2019 at 6:46 pm

      Very well written with tongue-in-cheek humor, while still providing valuable and specific advice on a very serious matter. By all reasonable measures, I would say this qualifies as professionally written without being dark or dull. As to the actual topic of business taxes, it’s one that my accountant and I take very seriously, but along the way we also enjoy a few sardonic laughs when discussing it. It helps to offset some of the frustration that often accompanies small business taxes, especially if you’re from my city and state.

      • Hannah Stacy | April 1, 2019 at 9:29 am

        Thanks for the feedback Linda!

    • elaine levi | April 1, 2019 at 5:09 pm

      I like his humor-format. I probably would have found this information boring and I’d glaze over.

      • Hannah Sullivan | April 2, 2019 at 8:32 am

        Thanks for reading, Elaine!

    • LeRae | April 3, 2019 at 4:57 pm

      Great article & very important advise to keep in your shirt pocket. I also quite enjoyed the delightful way you point out human stupidity..what a riot you are. Thanks for making my afternoon!!

      • Hannah Sullivan | April 4, 2019 at 8:34 am

        Thank you for your feedback, LeRae! We are glad you enjoyed the article.

    • Blanche D Grube | April 3, 2019 at 10:39 pm

      Great article,I’m going through IRS headaches myself right now because my bookkeeper failed to deposit payroll taxes. The bottom line is that if you are the owner, you need to know the books and can’t depend on anyone else to do it any better than you would do it yourself! The humor actually made the subject interesting.

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