HOUSTON BUSINESS REVIEW

THE CPA CORNER: THE BASICS OF TAX PLANNING
By C. Kevin Moore

Kevin Moore is the Principal with C. Kevin Moore & Associates and has two decades of experience as a Certified Public Accountant. Each week he provides the information you need to grow and protect your business.

Tax planning is a process of looking at various tax options in order to determine when, whether, and how to conduct business and personal transactions so that taxes are eliminated or reduced. As an individual taxpayer, and as a business owner, you will often have the option of completing a taxable transaction by more than one method. The courts strongly back your right to choose the course of action that will result in the lowest legal tax liability. In other words, tax avoidance is entirely proper.

Although tax avoidance planning is legal, tax evasion — the reduction of tax through deceit, subterfuge, or concealment — is not. Frequently, what sets tax evasion apart from tax avoidance is the IRS's finding that there was some fraudulent intent on the part of the taxpayer.

The following are four of the areas most commonly focused on by IRS examiners as pointing to possible fraud:

-Accounting irregularities, such as a business's failure to keep adequate records, or a discrepancy between amounts reported on a corporation's return and amounts reported on its financial statements.

-A failure to report substantial amounts of income, such as a shareholder's failure to report dividends, or a store owner's skimming from the cash register without including it in the daily business receipts.

-A claim for fictitious or improper deductions on a return, such as a sales representative's substantial overstatement of travel expenses, or a taxpayer's claim of a large deduction for charitable contributions when no verification exists.

-Improper allocation of income to a related taxpayer who is in a lower tax bracket, such as where a corporation makes distributions to the controlling shareholder's children.

A business owner may not reduce his or her income taxes by labeling a transaction as something it is not. So, if payments by a corporation to its stockholders are in fact dividends, calling them "interest" or otherwise attempting to disguise the payments as interest will not entitle the corporation to an interest deduction. It is the substance, not the form, of the transaction that determines its taxability.

There are countless tax planning strategies available, particularly if you own a small business. Some are aimed at your individual tax situation, some at the business itself. Make a plan. Work with your CPA.