Trusted attorneys for Estate Planning and Administration, Real Estate and Tax Matters.

Tax mitigation vs. tax evasion: Essential business knowledge

On Behalf of | Jun 25, 2023 | Tax Law |

Nobody wants to pay more taxes than they must, and every dollar your company keeps out of the government’s coffers is a dollar you can put back into your business. That makes it only natural to explore strategies to reduce your company’s tax liability.

However, there’s a big difference between “tax mitigation” (which is legal) and “tax evasion” (which is not). Understanding the red flags of tax evasion can help you remain compliant with tax laws and protect your company’s future.

Tax mitigation is nothing to be concerned about

Tax mitigation is just the strategic use of provisions within the tax code to minimize your business’s tax obligations while still remaining fully compliant with your obligations. It’s just responsible tax planning.

Examples include:

  • Using deductions and credits: Taking advantage of eligible business deductions and tax credits, such as research and development credits, investment incentives, or energy-efficient initiatives.
  • Careful entity structuring: Selecting the appropriate legal structure for the business, such as forming a corporation or utilizing a Limited Liability Company (LLC), to benefit from specific tax advantages and liability protections.
  • Strategic depreciation and amortization: Properly depreciating and amortizing business assets over their useful life to realize tax benefits and deductions.
  • Good international tax planning: Complying with international tax regulations, utilizing tax treaties, or implementing transfer pricing strategies to minimize the tax burden in cross-border transactions.

Tax evasion can destroy your business

Tax evasion involves the deliberate and illegal act of evading or avoiding the payment of taxes that a business is obligated to pay. Tax evasion can have severe consequences for businesses, including significant financial penalties, reputational damage and criminal charges for owners and other fiduciaries

Examples include:

  • Underreporting company income: Failing to accurately report sales revenue or hiding cash transactions to reduce the company’s tax liability
  • Inflating expenses: Overstating expenses or creating fictitious expenses to artificially reduce the company’s taxable income
  • Offshore tax evasion: Concealing business income or assets in offshore accounts to avoid taxes and circumvent reporting requirements

If your business partner seems to play loose and free with the company’s tax obligations, it’s definitely time to get some experienced legal guidance to help you protect your own interests and plan your next move.