Tax Planning in the Face and Aftermath of COVID-19

Tax Planning in the Face and Aftermath of COVID-19

The coronavirus has affected us all: Many of us have been downsized, furloughed, reassigned, redistributed or forced to work remotely. Some of us have started new businesses in the face of this; still others – existing business owners who were previously successful, have been forced to shutter themselves.  With safety concerns and financial uncertainty still looming, the only thing we do know is that COVID-19 has affected us all, changing the ways we approach everything; and its impact will be felt for years – and that definitely includes tax planning issues resulting from new legislation.

There will be an unprecedented number of bankruptcies and offers in compromise, accompanied by loss of homes and home sales. People with current and future tax and debt problems may be forced to sell their home, depending on the bankruptcy exemptions and specific rules in their state and it’s important to note that the last three years of federal tax assessments are not forgivable in bankruptcy.

With these kinds of things in mind, it’s now more important than ever to consult with a tax professional to help you navigate through the sweeping changes that have either already begun or are on the horizon. For instance, this may be a great time to consider submitting an offer in compromise for those who qualify and have IRS tax liabilities, given the unknown current economic circumstances.

Offer in Compromise is approved based on current status and circumstance and with no guarantees that a business will recover or you will return to work in a timely fashion, the chances of an offer being accepted by the IRS increases.

It is also a statistical likelihood that the individual states will raise taxes across the board to compensate for reduced tax income from state income and sales tax respectively.

End of year tax planning is already affected by legislative changes such as the reality that that most of the coronavirus-related provisions are for one year, and with this being an election year, a potential new administration may bring with it new changes in the foreseeable future.  As such, in the current landscape, tax professionals are left with a reality that everything we know may be temporary. 

Tax Planning, Tax Avoidance and Tax Evasion: It Pays to Know the Difference

Tax Planning, Tax Avoidance and Tax Evasion: It Pays to Know the Difference

In the past couple of weeks and considering the president’s actions – or inactions as the case may be – in regard to his taxes, may still be leaving some individuals and business-owners alike, confused about the legality of things. Or especially if it would be considered tax evasion.

There are some key features and distinctions that are important to note, here.

Tax planning is the process of elaborating the company’s financial related matters to maximize the tax benefits under eligible provisions of the tax framework. The planning assists taxpayers to lessen their tax liability through a variety of means, namely deductions, credits, rebates and exemptions provided under the corresponding tax laws.

A key feature of tax planning is its relation to the future. An efficient tax planner of the company with a good tax planning in hand may facilitate the tax minimization in either short term or long term. To bring the best possible outcome for the tax perspective, effective tax planning should bring below some essential elements into consideration:

  • Choice of business entity
  • Timing of Income
  • Business Size
  • Planning for Expenditures and Purchases
  • The Residency Status of the Business Owner and Where the Business Operates
  • Capital Structure of the Business

Tax avoidance is where some individuals and business owners may have some issues or feel especially concerned. As legal citizens and permanent residents of the United States, it is a duty and requirement to pay taxes, but naturally taxpayers want to save as much as – legally – possible. Tax avoidance may seem dubious or questionable, but it is all still part of effective tax planning.

Tax avoidance is the act of minimizing tax liability within the limits of the law or without breaking the law. In other words, taxpayers can use legitimate methods to reduce the amount of tax payable in association with their financial activities. Such methods to allow taxpayers to avoid paying tax to the government may include the followings:

  • Using tax deductions for decreasing business expenses and business tax bill
  • Delaying the payment of tax until a later date with an appropriate tax deferral plan
  • Taking advantage of tax credits for legal purposes like business purchases, benefiting the company’s employees for sick leave and family leave.
  • Sheltering revenue from tax liability through the establishment of employee retirement plans.

The key takeaway here is that what makes these things – tax planning as well as tax avoidance – legal is always going to be to ask yourself the purpose doing it, which should always be to maximize your savings in an efficient way, and not merely to try and “get over” on the government. Some taxpayers may consider loopholes a convenient form of getting away with something that everyone does, but, here, it becomes important to consider the nature and timing of everything as well: If you – or preferably a tax professional search for and apply tax loopholes that are legal, and do so before the tax liability becomes due – and you can prove everything as legitimate, you’ll most likely be audit-proof.
Anything else is tax evasion.

Tax evasion is any illegal method or unlawful attempt to reduce tax liability of taxpayers. It is highly attached to techniques or illicit practices which results in showing fewer profits to minimize the individual or company’s tax burden.

Examples of tax evasion usually include the following:

  • Making false statements and information
  • Inflating deductions without legal proof
  • Hiding related documents to prove the earned business profits like records of transactions or report of cash income
  • Concealing or transferring assets illegally
  • Magnifying tax credit
  • Claiming excessive expenditure

Tax evasion is a form of tax fraud which indicates illegitimate and deliberate actions for not paying taxes. Since employing such unfair means is fraudulent, any taxpayers regardless of individual or business committing tax evasion behaviors would be subject to statutory punishment such as a heavy fine or imprisonment.

Contact Dunham Tax Professionals if you have any questions about this or any other tax concerns.

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