When providing tax and business advice to individuals and companies, an attorney must keep in mind many aspects of the law and goals of the business owner. Over the past several months, I have written several articles relating to the “protection” of individuals and corporations and avoiding “piercing of the corporate veil.” As the year-end draws to a close, individuals and companies seek to find deductions to lessen the amount of taxes they will be paying.
This article focuses on the fact that the Income Tax Law is written in such a way to give individuals the “right” to tax plan in order to “avoid” paying taxes. Specifically, by paying certain expenses before the close of the tax year (such as property taxes, estimated taxes to the Franchise Tax Board, medical bills, and yes, even deductible legal expenses), can decrease this year’s tax burden. In addition, a company (which is on a cash tax basis) may desire to defer certain billings so that income is received in the next tax year, while increasing “ordinary and necessary” expenditures for this year. Such planning is perfectly legitimate and proper. I urge each and every taxpayer and business to spend some time with a qualified business/tax professional (such as an attorney or an accountant specifically versed in taxes) to do your year-end planning.
One of the largest deductions that is overlooked by various businesses is the establishment of a pension and profit sharing plan for their employees (and for the owner/operator). If the appropriate documents are prepared prior to the year end, the actual contribution to the profit sharing plan can be deferred up to 8 1/2 months. This is the only “accrual” item that a cash basis (taxpayer) can take advantage of.
The second part of this article deals with the issue of “evading” paying taxes. Unfortunately, I have conversations on a periodic basis with people who have decided not to “declare cash” or fail to report various earnings. In some cases, these individuals choose not to even file tax returns. Both of these actions are “illegal” and are considered “evading” taxes. The act of evading taxes is illegal and is both a Federal and State crime. What I find amusing is, if such individuals would report all of their income and with proper tax planning, they would not pay any more taxes, and not subject themselves to potential criminal action. These would include individuals who try not to report all of their income, use these funds to pay their rent, pay their living expenses, make payments on cars, and other related items. When the Internal Revenue Service conducts an audit, this becomes very clear to them as they check “life style” and determine that the amount of money being declared is not sufficient to make all of the payments that the individual is making. Everyone should report all of their “income” and use a tax advisor/attorney to help develop a tax savings plan.
If you have taken any action which could be considered “illegal,” you should meet with a tax attorney to discuss these issues and to correct the problem. Such meetings are confidential and are protected under the attorney client privilege. While there are various accountants who are well qualified to provide you assistance, there is no “accountant/client privilege” and such conversations with your accountant could be subject to discovery in criminal proceedings.
As the year ends, I urge each of you to seek proper tax and business advice, in order to avoid paying excessive taxes and to utilize the provisions of the Internal Revenue Code to your best advantage.