Differentiating Tax Evasion & Tax Avoidance

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When running a business, every peso, every centavo counts. Good financial management and accounting practices are essential to running a successful business. That said, all successful businesses do not make their way to success out of sheer luck; rather, their managers, owners, and executives carefully study their liabilities and assets, minimize the former and maximize the latter to gain good financial footing.

Part of minimizing liabilities is engaging in tax planning, which involves handling and managing finances and financial decisions to reduce your tax liabilities come tax season. Careful tax planning with the help of tax services in Manila will allow you to pay the least amount of tax as legally allowed. This is called legal tax avoidance, which is it is entirely different from tax evasion. Learn the difference between the two in this article to avoid hefty penalties stemming from paying the incorrect tax dues.

Tax Evasion

Tax evasion is an illegal act punishable by law. It involves the acts of not paying or underpaying one’s taxes, often by making deliberate false declarations. Tax and accounting services in the Philippines note that the most common forms of tax evasion include the deliberate understating of revenues, profits, and gains, and the deliberate overstating of expenses and deductions.

Tax Avoidance

Tax avoidance is legal means of lowering your taxes by making use of all possible tax benefits. It is ethical and allowed by law. Tax avoidance requires careful planning and meticulous preparation. Here is how you can do it to minimize your own business tax liabilities, or even tax liabilities as a self-employed person.

1. Properly track and claim allowable deductions

Allowable deductions are necessary expenses that a business must make to create an income. This includes the cost of goods, including operating and overhead expenses. According to tax and audit services in the Philippines, this necessitates proper documentation of each expense in your books. You need official receipts or sales invoices if you want to file for deductibles because you must submit supporting evidence to the BIR. Forgetting to log an expense or understating any of the aforementioned will mean that you have fewer tax deductibles. 

These allowable deductions also have criteria. It must relate to your business while still being a reasonable amount and in compliance with the withholding tax requirements, and it must be supported by documents and not be illegal. Here is a comprehensive list of allowable deductions:

– Bad debts

– Advertising and Promotions

– Contributions to Charity

– Utilities

– Depletion

– Depreciation expense

– Fringe benefits

– Industry insurances

– Losses

– Consulting fees

– Office expense

– Miscellaneous fees

– Travel fees

– Salaries and allowances

– Royalties

– Tolling fees

– Training and seminar expense

– SSS, PhilHealth, Pag-Ibig contributions

2. Provide your employee with good medical insurance

As mentioned in the list above, insurance expenses are considered an allowable deduction. However, you can also provide medical insurance on top of PhilHealth and SSS benefits. Not only will this cut your employee’s taxes and that of your business, but you are also able to save from reduced taxes while putting funds aside for emergencies that may affect your business and the team that keeps it running. Note that healthy team members are what keep your business going. Providing medical insurance for your employees is a win for both you and them. 

Noteworthy, the maximum non-taxable amount for health insurance is P 10,000. So make sure that you avail of insurance plans that are compliant with this requirement.

3. Make charitable donations

Charitable donations are tax-deductible, meaning the government sees it as lowering your income. If your business, or you as an individual, have long been supporting charities and making donations, you can list this down as a deductible. Again, if you want make a tax write-off using your donations to non-profits, you must have proper documentation to support your claims. 

4. Diligently track your books of accounts

Good bookkeeping practices is what allows you to properly plan your finances and taxes. Accounting has to be taken seriously if you want to maximize your profits. Poor accounting habits will lead to poor business outcomes that will make for inefficient use of your resources. If you are still unfamiliar with accounting and bookkeeping, consider hiring a professional, or outsourcing help. There are numerous online firms that provide for accounting needs at cheaper rates than in-house accountants.

If you need assistance in computing the maximum tax-deductible expenses for your business, call our team of CPAs for assistance. We can help you legally avoid paying enormous tax dues while staying compliant with the bounds of the law. Our team provides tax and accounting services in Pasig. We can help you prepare your tax returns with the appropriate supporting documents. Call us for a free 30-minute consultation.