Minimizing Tax versus Avoiding Tax

Nobody likes paying tax (not even me!), but without taxation, the government wouldn't have the money it needs to provide all the programs and services that it does. Tax, therefore, is a necessary evil.

As a taxpayer, personally and corporately, you are fully entitled to plan your affairs so as to minimize the tax you pay. You can choose the best way to pay yourself, deduct all of the expenses that are legitimately for business purposes, and set up the corporate structure that best minimizes the tax bill.

However, there is another category of "tax planning" called tax avoidance, and it is illegal. You are engaging in tax avoidance when you hide income, deduct fictitious expenses or expenses that are not related to the business, and when you don't declare all your sources of income. There are a few good reasons to stay away from this kind of "planning":

It's illegal: Most jurisdictions have an anti-avoidance rule. If you are caught, you could face significant fines and penalties. and could go to jail. (It's really hard to run a small business from jail.)
It's a waste of time: It falls into the category of "Oh, what a tangled web we weave, when first we practice to deceive." Hiding income and faking expenses takes time. If, instead, you spent that time on building your business and getting more money in the door (even if it is taxed), you would be far better off in the long run.
Eventually, it will make you lose sleep: Most taxation authorities can go back in time indefinitely to examine your claims if they think you are committing fraud. Do you really want to worry every time you get a notice from the government in the mail or have to hold your breath every time you file a tax return? Not worth it!

Search Site