Tax avoidance is not a crime. You can’t get away with not paying your taxes without legal and criminal consequences. There is a difference between tax avoidance and tax evasion. Tax evasion is a criminal offense.
No one likes having to pay taxes but we pay our taxes so that the government has the necessary resources to take care of some of the basic necessary of your lives.
While, tax avoidance is defined as doing everything possible within the law to reduce your tax bill. A taxpayer may lawfully arrange their affairs to minimize their taxes through several creative vehicles. It is perfectly lawful to take advantage of all available tax deductions. It is also lawful to avoid taxes by making charitable contributions. There are also many other vehicles or steps that you can take to reduce your taxes.
Remember, there’s a difference between avoiding taxes, and evading taxes. The former is legal and the latter will put you in prison. So work within the law to lower your taxes. Don’t be stupid and get yourself into legal trouble. There are enough deductions within the tax code that you can take advantage to lower your taxes to reasonable levels. No, you can’t avoid paying taxes altogether but we all have a share burden to give the government the money it needs to operate and help others.
There are many benefits to form a S corporation. The obvious benefit is that they shield you from personal liability for business obligations and protect your individual assets. A S corporation also allows you to pass through your business income and loss to flow directly to the shareholders. This is similar to the tax benefits that a sole proprietorship, partnership or limited liability company.
This means that as a shareholder of a S corporation you can take advantage of business losses and operating losses against other income. That is why many tax attorneys will recommend that new start up start out as S corporations in their early years and then switch to a C after the business becomes profitable.
To qualify for a S corporation with the IRS, your corporation must: (1) have no more than 75 shareholders; (2) all the shareholders must be individual United States citizens or resident aliens; (3) only have one class of stock; (4) the corporation does not own more than 80% of the shares in another corporation; and (5) all the shareholders consent in writing to S corporate status by filling out and signing IRS form 2553.
So how this works is that, say you and your wife run a S corporation business. Your wife works at the dentist office and makes $40,000 a year. You guys file tax returns. The business lost $10,000.00 this year. You two can use your $10k business lost to offset your $40k income to take your taxable income down to $30k.
However, there are also negative aspects to a S corporation which we will discuss more on a later date.
If you are a sole proprietorship and your business suffered business losses, it is possible for you to use those losses to claim a business operating losses for a tax break. Congress created this right to help struggling businesses and can be used to offer your some tax debt aid.
A sole proprietorship can claim a business operating loss on their annual individual tax return. These types of loses are called net operating losses. This occurs when a business expenses and deductions are more than its total income. If this is the case for you then you can use a net operating loss to offset your other income to lower your total tax.
Many businesses don’t realize they have this option. The rule is very complex. It’s best to talk to an account, tax attorney, or a tax relief service to take full advantage of this rule. This can be very helpful to an individual or business who owes back taxes to the IRS.
You can take a net operating loss in the year that it occurs. If the losses exceed your total income in the year that you want to use it, you can amend up to five past tax returns. If you still have more unused losses to use, you can carry it forward up to 20 years. So in summary, you can use the loss in the year that it occurs, you can apply it up to five years going backwards and up to 20 years going forward. You can’t use the entire net operating loss in any given year if it’s application would wipe out your entire income and take you below zero. That is why you are then able to go back 5 years and go forward 20 years to apply the losses until it is all used up.
So here is an example of how it works. Say you were in business for 4 years. In year two and three you finally made a profit and in the last year you suffered $50,000 in debt. Your wife also worked and made $40,000 a year. So that year, your gross family income was $40k. You can apply $40K of your $50K net operating losses against your $40K income for that tax year. The remaining $10k in net operating loss can then be applied on the tax return going back five years.
So if you have any back tax and owe money to the IRS, review your records and see if you can take advantage of this rule.