Updated: Aug 17
I received an interesting tax tip from the IRS, Tax Tip Tax Tip 2020-102 which stated that taxpayers must pay no more than the correct amount of tax. It goes on to say that taxpayers have the right to pay only the amount of tax legally due. This is one of ten rights known collectively as the Taxpayer Bill of Rights.
This IRS Tax Tip directly ties into tax planning because the IRS encourages taxpayers to use the IRS code and tax laws to their benefit as this will result in only paying what is legally due. What I find is that a lot of business owners & their advisors are intimidated by the tax code and some believe that it is a system to punish you for making money. But honestly, the majority of the tax code is written to help taxpayers save money.
The tax code is really a series of incentives to do the things that the government wants you to do and receive a benefit. For example, the government wants a booming economy so if you own a business, you have the ability to deduct business expenses. The government wants housing so if you invest in real estate, you get benefits such as depreciation. Lastly, if you create jobs you get related credits and deductions. All of what I just named are ways to reduce your taxes not increase them.
A good example of how a business owner has legally overpaid taxes goes something like this:
You hire three (3) people who are in a Work Opportunity Tax Credit “WOTC” target group. For those unfamiliar with the WOTC, it is a tax incentive for Employers to hire people in targeted groups, such ex-felons, food stamp recipients, military veterans, the long-term unemployed, etc. and the Employer will receive a tax credit (if they follow the certification steps). Back to the example: You hire 3 people in the targeted group and they work 400 hours during their first year of employment. For simplicity purposes, assume each Employee qualifies the Employer to receive a $5K credit which totals a $15K tax credit for the employer at tax time. A tax credit is awesome because it lowers a taxpayer’s tax liability dollar for dollar unlike a tax deduction. The Employer has legally overpaid their taxes if they failed to meet the employee certification requirements or ultimately, had no clue about the WOTC. The small business owner has now legally overpaid taxes by $15K. Therefore, if the taxpayer owed a tax liability of $40K, their tax liability could have been $25K if the WOTC had been implemented.
In closing, one of the easiest ways for a business owner to put money in their pocket is to implement tax planning strategies to legally reduce their taxes. Get a proactive tax plan which will most definitely increase your bottom line.
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