No way! Preparing your tax return is difficult, and you may make mistakes during the process. But evading taxes deliberately is a crime that can have serious consequences for your business: an IRS audit, fines… you could even face criminal charges!
Declaring less income, declaring personal expenses as business expenses, and altering your accounting records are tricks that violate the tax law. Unfortunately, some unscrupulous people use them in an attempt to increase their tax return.
However, you can still get a fair tax refund without ending up in jail. In this article, we’ll provide you with a list of best practices for your business to get a fair refund. But first, we’ll show you how to differentiate between taxable income and not taxable income.
Which income is taxable and which is not?
Can you imagine owing money to the IRS without knowing it? It is possible. Not distinguishing between taxable income and non-taxable income from your business could result in mistakes in your tax return, drawing the attention of the Internal Revenue Service.
According to the IRS, all gross income is taxable, less the deductions. The income includes money from salaries and interest or dividends resulting from any investment. Not only money is subject to taxes, but also income in the form of goods and services is taxable.
Since a company’s income comes from a large number of sources, the list of those that can be taxed is extensive. Luckily, some income is exempt from taxes (it’s a deduction).
Knowing this difference will allow you to better prepare your tax return, help you better manage your finances and investments, and give you the opportunity to get a more generous tax return. The following are the most common taxable and non-taxable income sources for business:
- Royalties from properties in the oil sector, royalties from copyright and patents
- Income from the rental of goods or properties
- Dividends on shares
- Earnings when selling certain assets, such as property, stocks, and bonds
- Interests on the income generated by accounts abroad
- Income of independent workers
- Tax on the value of properties received in exchange for services
- Income generated by investing in virtual currency (cryptocurrency)
- Refunds in cash on purchased items
- Interests on municipal bonds
- Return of capital
How to increase your tax refund in 6 steps without breaking the law
As we mentioned before, your business can get a fair tax refund legally. However, this will depend on how your company is structured.
A large number of small businesses are structured in such a way that their income is transferred directly to the owners, who pay taxes on their individual tax returns. As these companies do not pay taxes directly to the IRS, they do not receive a refund.
C corporations are the only business entities that can receive a tax refund, as both their owners and the company itself must file taxes. In other words, the business pays income tax directly to the IRS.
Therefore, a C corporation will receive a refund if it pays more taxes than is due during the year. But if this is not the case, there are certain practices that could increase your chances of receiving a tax refund:
1. Take advantage of tax deductions. To reduce taxes on their income, corporations can deduct legitimate business expenses, which are those incurred to increase the company’s profits. Among the main deductions are:
- Vehicle expenses. Most small businesses have some type of vehicle. If you verify that you use it strictly for business purposes, you can deduct its costs.
- Home office. If your business operates from your home, partially or full time, you can request a deduction, which is allocated based on the space your home office occupies. If you rent the space where your business operates, or some type of equipment or machinery, you can also deduct these expenses on your tax return.
- Meals and entertainment purchased for business purposes. Up to 50 percent of expenses in meals and entertainment related to business can be deducted.
Other expenses that can be deducted are: investments in advertising, salaries and bonuses, insurance, payments to independent contractors, travel expenses and supplies.
But you must be careful and get informed before requesting a deduction. Misinterpreting the tax code and deducting the wrong items could alert the IRS. Here you’ll find a list with the most common deductions for business owners.
2. File your taxes on time. Preparing your taxes ahead of time will give you several advantages. You can gather and review in more detail your documents and records. Also, if you are entitled to a tax refund, you can access the refund faster, and reinvest it in your company.
3. Hire a professional. Preparing a tax return rigorously is hard. Not only it takes time, but also effort.
If you feel overwhelmed, you can hire a professional to help you review your business and to give you advice on the documentation you need to gather and the possible deductions.
To find the best qualified professional, you can ask for references to a business advisor. It is better if you hire a Certified Public Accountant, as these professionals have experience and are very well trained.
Here you’ll find a list of the best places to go to file your business taxes.
4. Check your personal accounts. Although it is not advisable, you may have made business purchases with your personal credit cards or personal bank account. For this reason, it is a good idea to check your bank statements to identify business expenses.
Then, you or your accountant can identify these expenses so that they are reflected as company expenses in your tax return.
5. Take advantage of tax credits. There are several tax credits available for business which your company could request. These credits consist of an amount of money that taxpayers can subtract from the taxes owed.
They are more favorable than tax deductions, as they reduce tax obligations dollar for dollar. Tax credits can be refundable or non-refundable.
6. Reward your employees. Offering incentives such as bonuses, gifts and rewards to your employees, in addition to motivating them, is also a strategy that you can use to increase your tax return
The IRS has a guide where you can find additional benefits for workers.
To Sum Up
Declaring less income on your tax return is a very bad idea. If you do so you will not increase your tax refund, instead, you will be sending an invitation to the IRS to audit you.
Differentiating taxable income from non-taxable income from your business will allow you to better prepare your return, including accurate information that could ensure a refund.
Don’t forget that, according to the law, you can get a refund. Learning about your deductions, preparing your paperwork on time, and seeking professional help are some of the best practices you can follow to get a refund, which you could even use to capitalize your business.
Learn here if undocumented immigrants in the U.S. can file taxes.