5 Really Dumb Ways to Save Money On Your Taxes

[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 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! There are many legal ways you can have great returns if you understand tax laws and how to legitimately reduce your taxable income.

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 week on the Small Biz Ahead podcast.