Hi. I’m Bette Hochberger, CPA, CGMA. Today, I will talk about how tax planning to avoid taxes is legal, but tax evasion is criminal and can land you in jail. I usually like to tell clients that we’ll keep them out of jail. We will never give you advice that falls into the realm of tax evasion. So, what gets into that murky world of you wanting to pay less in taxes, but you’re going to get yourself in trouble? There are a few key things. If you’re lying about your taxes or anything affecting your taxes, that’s tax evasion, and that’s not what we want to do. The really obvious things are ignoring or not reporting income. 

Making up expenses

People often ask me, “Oh, well, how many expenses can I take for my type of business?” There needs to be an amount that you can take for your type of business. There’s what you actually spent money on that you can deduct, and then there’s lying about it. That’s how it goes. As long as you can justify what you’re doing in your business, then it’s real – claiming personal expenses as a business. Just because you use your business accounts to pay for personal expenses doesn’t make those personal expenses actually have a business purpose.

A lot of times, somebody will have a business card, and they’ll go shopping. Then we have to ask them, “Hey, I see these expenses for Target and Macy’s,” or whatever the case may be. It’s not necessarily normal for the type of business that person has. And we have to ask, “Hey, what is this? Is this an actual business expense?” And if it’s, “No, I went shopping, and that’s the card I used,” well, using the business card doesn’t make it a business expense. It has to have a business purpose. So trying to push off personal items as business items is not good, and no one should be doing so. 

Sham Transactions

Sham transactions are transactions you’re trying to pass as something for business that isn’t. Say you take your dog to the vet and try to claim it’s a medical expense. That’s a sham transaction. It’s not real. It’s not legitimate. It’s not deductible. It’s tax evasion. 

Tax Planning and Tax Avoidance

Tax planning and tax avoidance are completely legitimate. In this case, we’re not making things up. We’re not lying about our expenses. We’re not lying about our income. We’re managing them. So, for example, tax avoidance. If you know you have a big amount of income coming at the end of the year in December, if you can make sure that income hits in January instead, that’s tax avoidance for the current year. You’re kicking that can down to next year. We’ll deal with it next year. But for this year, it will lower your taxes, and the corollary to that is expenses. If you know, you’ve got a big expense coming up in January, and if there’s a way you can accelerate it into December, that will be more expenses in that year, and your taxes will be lower. That’s totally legitimate. That is not tax evasion. That’s tax planning and tax avoidance. 


 Make sure you are claiming the credits that you are entitled to. One big one that a lot of our clients end up working with us to get is what we refer to as the R&D tax credit. It’s the increasing research and development tax credit. If you’re in an industry or doing the type of work, you qualify for that credit; you 100% are entitled to claim it and use it to offset your taxes. So again, tax avoidance is totally legal. If you’re lying about it, though, that’s tax evasion, and that’s not good.  

Knowing What Deductions You Can Take for Your Business

It’s not an issue of how much office expenses a business like mine can take. It’s documenting things you legitimately spend money on in your business and ensuring you capture that. For example, business travel. There’s a right and wrong way to business travel; you must document it properly. We hear a lot about meal and entertainment deductions. Entertainment’s no longer deductible, which is very important to know. Meals, though, can be deducted. And again, you have to document it the right way. So here, we’re ensuring we maximize our legal deductions, not making anything up because it is tax evasion, which is the bad one. This is going to lower your expenses legitimately. 

Now, there are other things that we can do when it comes to tax planning and tax avoidance—for example, your entity structure. We’ve talked about this in other videos. Are you an LLC, an S Corp, or a C Corp? How you’re structured can also affect your taxes, and as long as it’s a legal structure for your actions, there’s no reason not to do the one that will save you the most money. 

So at the end of the day, tax planning for tax avoidance, yes, we love it. We do it. We help clients with it all day, every day. Dealing with tax evasion, you’ll have to go elsewhere if you want to do tax evasion. We will not help you with that one. I do not want to visit you in jail, haha. If you have questions about tax planning or avoidance, drop them in the comments, schedule an appointment, or message us. Whatever it is, we’re happy to work on tax planning to lower your taxes legally. Stay safe, and we will see you next time.