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Tax Avoidance and Tax Evasion

Close up of accountant going over tax documents with a pen and calculator

We’ve been hearing a lot about Donald Trump’s taxes lately. Did Trump avoid paying taxes? Did Trump cheat on his taxes? We are curious too. However, before we pass judgment, it’s important to understand the differences between tax avoidance and tax evasion.

Tax Avoidance

The IRS defines tax avoidance as “an action taken to lessen tax liability and maximize after-tax income”. Therefore, tax avoidance is financially advisable and even the IRS says it’s “perfectly legal.”

Tax avoidance involves claiming deductions, credits, and adjustments allowed by the U.S. tax code. Most Americans practice tax avoidance. Simple examples of business tax avoidance include:

  • Deducting legitimate business expenses, such as loan interest or business travel
  • Setting money aside in a Health Savings Account (HSA)
  • Accelerating depreciation (expensing the cost of capital faster than it becomes obsolete or wears out)
  • Changing your business structure to lower its tax rate

Few people want to pay more taxes than necessary. However, some business owners aren’t aware of all the ways they can legally minimize taxes. That’s why it’s advisable to engage a CPA to prepare your taxes.  A skilled CPA stays up-to-date on the latest tax code changes to help you minimize your business’s tax liability.

Momentum CFO offers services where we will work with you and your CPA to help ensure your business pays as little as legally possible. We create financial projections for you to assist with tax planning. These projections forecast your business’s profit or loss for the year.

Your CPA inputs numbers from Momentum CFO’s projections into their tax planning software. Then, he or she can estimate how much your business may owe. Next, Momentum CFO works with you to take actions that will further minimize your liability. 

 Tax Evasion

On the other hand, we have tax evasion. According to the IRS, tax evasion is “the failure to pay or a deliberate underpayment of taxes”. Unlike tax avoidance, tax evasion is illegal. You could face jail time, fines, or both if you are caught. 

There are many ways business owners can evade taxes.  Momentum CFO does NOT condone tax evasion. Examples of evasion include:

  • Under-reporting income
  • Inflating expenses
  • Paying employees in cash to avoid employer-paid income taxes
  • Claiming personal expenses as business expenses
  • Not paying taxes at all

As a business owner, you should never avoid paying your taxes. However, if you do feel stuck come tax time, drop us an email, and let’s see how we can help you reduce your tax liability. 

The Bottom Line

So… did Trump avoid or evade taxes? Since Momentum CFO hasn’t reviewed his tax filings, we don’t know. It will be interesting to learn more when his taxes are made public.

What we do know is that savvy business owners practice tax avoidance. With smart planning, you can reduce your business’s tax liability. Engage Momentum CFO to create a profit and loss forecast for your business. And, be sure to work with a CPA to confirm that the tax minimization actions you take comply with the U.S. tax code.  

Ready to get started on your financial projections?  Book your free consultation today and let’s work together to minimize your business taxes.