Attention entrepreneurs! This article will provide detailed instruction on how to hide business profits and avoid paying taxes (legally). You will also learn how multi-million and billion dollar companies are able to generate insane amounts of money and pay little to no taxes. Keep reading because the information about to be revealed could impact your future.
I started my entrepreneurial journey at age 19. If you were like me, you might have experienced a tax bill nightmare because you simply did not know how things worked in the first few years of business. Or, maybe you are preparing to receive a large amount of money from an asset sale, and you are trying to figure out a way to hide it from the IRS and avoid paying taxes.
I will start with the basic strategy: At the end of the year, businesses should attempt to strategically break even or record a small profit. If there is too much profit, the business will owe more in taxes. So, how does an entrepreneur avoid paying taxes? The following are seven ways to avoid paying taxes to the government.
1. Employee Bonuses
The first thing you can do is pay yourself a bonus. You can also pay a bonus to employees. I should note that each strategy highlighted in this article will almost certainly require some level of input from a certified public accountant (CPA). With this strategy, the company was profitable. But there was enough profit to share. To reduce or eliminate taxes, an entrepreneur can pay a bonus to employees (including themselves) for a job well done.
2. Charitable Contributions
The second strategy is to donate money to a good cause. This will reduce or eliminate taxes owed to the IRS. I should note that the tax deduction only works if the organization is a registered non-profit. If it is not a 501c3, then the contribution basically gets treated as an advertising expense. The interesting thing is a non-profit donation can sometimes have the effect of generating even more money; as if it were an advertisement. Occasionally, a non-profit organization will promote a business, directly or indirectly, after a donation has been made. This might be through advertisements, newsletter promotion, and sometimes even naming a building or event in gratitude to the contributor.
3. Buy Needed Items at the End of the Year
Another way to avoid paying taxes is to buy something toward the end of the year. This will get rid of excess profits and lower your tax burden. Yes, you basically get to go shopping. The strategy is to allocate excess profits toward endeavors that will help grow the business. Entrepreneurs can purchase things like equipment, vehicles, machinery, and beyond. Excess funds can also be used to fix or upgrade things. The money can even be spent on advertising. And again, it is important to do any business-related shopping before the end of the year.
When a business has excess profit, one solution to the problem is to take on debt. Whenever a purchase is made on behalf of a business, it is considered a debt, which is generally a bad thing. In business, debt is treated differently because it ends up being used for leverage and growth. The list of things you can do with excess profit is astronomical. Did you know that a business can have a brokerage account? Did you know they can invest in things like bonds or even real estate? Talk to your CPA.
4. Pay Down Future Expenses in Advance
The fourth strategy that can be used to hide business profits and avoid a big tax bill is to pay down inevitable expenditures in advance. For certain expenses, a business might even be able to pay them off to save on taxes. If the business did great throughout the year, there would be a profit. An entrepreneur would then speak to their CPA around the third quarter or beginning of the fourth quarter. Let's assume the business was projected to have $60,000 in profit by the last day of December. Most business owners do not want to pay taxes on $60,000. But how do you hide this much profit? There are a few things you can do.
The business might be able to pay rent in advance. They can pay for cell phones and other utility bills in advance. They can pay for leased vehicles or equipment in advance. To eliminate or reduce taxes, pay for inevitable expenses in advance. The key is to get rid of excess profit during the current tax year (before December 31st). This will lower, or maybe even eliminate, what the business would otherwise have to pay to the IRS.
5. Contribute to Retirement
Strategy number five is to put excess profits into a retirement account. This is related to the first strategy of paying bonuses to employees. But it is quite different because a regular bonus is going to have taxes come out as if it were payroll. In comparison, when money is allocated into a retirement account, there is no tax. The caveat is the beneficiary cannot really touch it until what is considered retirement age. But it is possible that the profit from the business [into a retirement account] can make you a millionaire well before age 60 because of compounding interest. There are contribution limits and other stipulations which govern retirement accounts. Talk to your CPA.
6. Write Off Unsellable Inventory
Once again, we are working our way through how to avoid paying small business taxes for good. Strategy number six is to check to see if the business is in possession of obsolete, stale, defective, or damaged inventory. Many businesses will occasionally encounter items that cannot be sold for various reasons. If your business has unsellable inventory, determine the monetary value of the loss and inform your CPA.
NOTE: The more inventory you can write off, the lower your tax burden will be.
Often, there are new trends and what was in style 5 years ago is no longer in style. So, bad inventory can be written off to reduce taxes. What happens to unsellable inventory once it has been written off? It can be donated to charity, used for parts, marked down and resold, or simply destroyed.
7. Have a Sale
Strategy number seven affects businesses who deal in inventory: traditional retailers. One way to reduce tax liability is to strategically eliminate inventory. This can be done by having a sale. A while ago, I did a video explaining why there really is no such thing as a holiday sale. The markdowns that take place around November or December have more to do with the U.S. tax code.
The IRS treats excess inventory as money in the bank that has yet to be realized. So, to avoid paying taxes, a prudent entrepreneur should eliminate excess inventory. One way to do this is by having a sale. Much of the inventory needs to be liquidated before the year ends.
Once the sale has completed, the business has essentially traded tangible goods for dollars. Let's assume the business made a profit; even on marked down goods. So, what happens with this new infusion of cash? An entrepreneur can now implement any of the strategies discussed earlier. One possibility is to strategically take on debt by buying new inventory. The purchase of any new inventory should take place in the current year that is ending. It is generally not advised to take possession of new goods until the following year.
Bonus Tax-Saving Tip
This article highlighted seven strategies on how to legally hide business profits and avoid paying taxes. Once again, here are the seven ways:
- Employee bonuses
- Charitable donations
- Shop for needed items just before the year ends
- Pay down inevitable expenses in advance
- Contribute to retirement
- Write off bad inventory
- Have a sale to get rid of excess inventory
I’ll leave you with an additional word of advice: A common mistake that entrepreneurs make is incurring huge sums of money right before the end of the year. If you come into a large amount of cash in December, and you have a plan to invest it in such a way that it lowers your tax burden, then you are safe. Whenever possible, entrepreneurs should avoid any and all big money deals at the end of the year because it is difficult to get rid of a nest egg by December 31st.
As soon as the money is incurred, the clock is ticking. If the business inherits $400,000 in December, there will be a massive tax bill, assuming the money was not reallocated before December 31st. But, if the transaction was delayed and the money taken at the beginning of the year, it is much easier to account for the excess cash and make prudent investments so that the year ends with minimal profit.
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