6 Corporate Tax Avoidance Strategies to Reduce Your Tax Bills

While the average taxpayer counts down to April 15th with a mix of anxiety and dread, many corporations are quietly employing sophisticated strategies that allow them to significantly reduce their tax burdens — while keeping shareholders smiling and wallets full. 

But how do they do it? What secrets lie behind the closed doors of boardrooms, and what can be learned from their tactics?

Get ready to unlock the secrets that could reshape your understanding of corporate finance!

From filing your tax returns to identifying all the expenses you can deduct from your taxable income, doola can help you enjoy complete peace of mind while utilizing every tax-saving opportunity.

Join us as we peel back the layers of these financial maneuvers, unveiling not just how corporations slash their tax bills but also why it’s a game-changer for business — and all of us. 

What Are Corporate Tax Avoidance Strategies?

Corporate tax avoidance is a hotly debated topic in today’s business world. It refers to the legal methods corporations use to decrease their taxable income and, therefore, reduce the amount of taxes they are required to pay. 

Corporations often use tax avoidance to minimize their tax bills without violating any laws.

This can be achieved through various strategies, such as shifting profits to low-tax jurisdictions, taking advantage of loopholes in tax laws, or using complex business structures.

While these tactics may be perfectly legal, they often lead to reduced revenue for governments, which affects public services such as healthcare and education, creating an uneven playing field for businesses that do not have the resources or expertise to utilize these strategies.

Tax Avoidance vs. Tax Evasion: How Corporations Reduce Tax Bills

Two terms are often used interchangeably but have significantly different meanings when it comes to taxes — tax avoidance and tax evasion.

While both involve minimizing the amount of taxes paid, they have distinct differences in their approach and legality.

Tax avoidance is a legal method used by corporations to reduce their tax liability.

It involves taking advantage of loopholes and exemptions to legally pay less in taxes. These methods are disclosed and reported on tax returns, making them completely transparent to the government.

On the other hand, tax evasion is a deliberate attempt to illegally avoid paying taxes by intentionally failing to report income or falsifying information on tax returns.

This can include underreporting income, overstating deductions, using fake documents, or hiding assets offshore. 

Unlike tax avoidance, which uses legal methods to lower taxes paid, tax evasion is a crime punishable by fines and possibly even jail time.

Understanding the difference between these two concepts highlights why corporations must operate within ethical boundaries when managing their tax liabilities. 

While it may be tempting for companies to use aggressive tax avoidance strategies to reduce their taxes, they must ensure that these practices are in line with the law and not cross over into illegal activities of tax evasion.

6 Common Corporate Tax Avoidance Strategies Used by Corporations

Corporate tax avoidance is a controversial topic that has been debated for years.

While corporations have become extremely savvy at finding ways to pay less in taxes, you can also do the same if you know where to look for corporate tax reduction methods. 

1. Transfer Pricing

Transfer pricing involves the transfer of goods, services, or intangible assets between entities within the same multinational company.

The primary goal of transfer pricing is to reduce the corporation’s overall tax liability by shifting profits to low-tax jurisdictions or countries.

One typical example of transfer pricing is when a corporation sells goods or services from one subsidiary located in a high-tax country to another subsidiary located in a low-tax country at an inflated price. 

This artificially inflates the costs for the subsidiary in the high-tax jurisdiction, reducing its overall profitability and taxable income.

At the same time, it increases the profits and taxable income of the subsidiary in the low-tax jurisdiction without any additional effort or investment.

Another way corporations use transfer pricing is by licensing intangible assets such as intellectual property rights or trademarks at a higher price than fair market value.

By doing so, they can shift their profits to countries with lower taxes on such assets.

2. Offshoring Profits

Offshoring profits is a common tax avoidance strategy that involves relocating profits made in one country to another with lower taxes or more favorable tax laws. This allows companies to legally reduce their taxable income, effectively decreasing the amount of taxes they owe.

Corporations can offshore their profits in several ways.

One method is “transfer pricing,” which involves setting prices for goods and services transferred between different branches or subsidiaries of the same company in different countries. 

Another way companies offshore their profits is through the use of tax havens — countries or territories with very low or nonexistent corporate taxes.

These offshore locations offer lenient tax laws and banking secrecy, making it easier for companies to avoid paying taxes on their profits.

Corporations often shift their debt from high-tax countries while moving earnings to low-tax jurisdictions or reincorporate their company in a low-tax jurisdiction by merging with a foreign company while still maintaining its operations and headquarters elsewhere.

3. Corporate Inversions

Corporate inversion refers to the process of relocating a company’s headquarters to another country with lower tax rates in order to evade higher taxes in its home country.

So, why do corporations choose to undergo an inversion? 

The main reason is to take advantage of lower corporate tax rates and other favorable tax laws in certain countries.

For example, some countries have territorial taxation systems that only tax income earned within their borders. 

Inversions can take place through various forms, such as mergers, acquisitions, or the creation of new subsidiaries based in another country.

This means that companies can maintain operations in their original country while taking advantage of the tax benefits from the new location.

In addition to lowering their taxes, corporations also benefit from inversions through strategies such as earnings stripping. This involves shifting profits from high-tax jurisdictions into low-tax ones through intercompany transactions like loans or royalties. 

These transactions allow companies to artificially increase expenses and reduce taxable income in high-tax countries while earning profits abroad at a lower rate.

4. Income Shifting

Income shifting refers to the practice of moving income from one entity to another to reduce tax liability.

Large corporations commonly use this tax avoidance strategy, as it allows them to lower their overall tax bill and increase their profits.

One way that corporations engage in income shifting is through intercompany transactions.

This involves shifting income from a high-tax jurisdiction to a low-tax jurisdiction by creating subsidiaries or shell companies in countries with favorable tax laws. 

These subsidiaries are then used for invoicing, licensing agreements, or management fees between different parts of the corporation, resulting in reduced taxable income for the parent company.

In addition to these methods, multinational corporations also take advantage of discrepancies between foreign and domestic tax laws.

By strategically locating operations and assets in countries with more favorable tax codes, they can shift profits and minimize their global tax burden.

Moreover, some companies engage in earnings-stripping techniques where they leverage debt financing between related entities to shift profits offshore. This allows them to deduct interest payments on loans while reporting higher profits in low-tax countries.

5. Accelerated Depreciation

Accelerated depreciation is a tax strategy used by corporations to reduce their tax bills.

It allows companies to deduct the cost of an asset at an accelerated rate rather than the traditional method of straight-line depreciation, which deducts the cost evenly over the asset’s useful life.

Typically, tangible assets such as equipment, buildings, and vehicles are eligible for accelerated depreciation.

This means that companies can claim a higher amount of depreciation in the early years of an asset’s life, resulting in larger deductions and, ultimately, lower taxable income.

One popular form of accelerated depreciation is called bonus depreciation. Under this method, businesses can claim an additional 100% deduction on certain types of assets in the first year they are placed into service.

The rationale behind this strategy is to encourage businesses to invest in new assets and stimulate economic growth.

However, critics argue that it primarily benefits large corporations who have the financial resources to make significant investments in new equipment.

Another common form of accelerated depreciation is called Section 179 deduction, which applies to smaller businesses. Under this provision, companies can expense up to $1 million worth of assets in their first year instead of depreciating them over time.

6. Net Operating Losses (NOLs)

The concept of NOLs revolves around a company’s ability to offset its taxable income in one year with losses incurred in another year.

Essentially, this means that if a corporation generates more expenses than revenue in a given year, it can use those losses to reduce its taxable income in future years.

The use of NOLs is not limited to just one type of loss — it includes any incurred business expense, such as operating costs, interest payments, and depreciation. This allows corporations to be strategic about how they report their losses and when they use them for tax purposes.

Another method corporations use is aggressive restructuring or “paper” transactions.

For example, a company may acquire another struggling business solely to deduct its losses from its profits. 

Moreover, some large multinational companies have taken advantage of NOLs by shifting profits and expenses across different countries where they operate. 

Companies can further reduce their taxable income by generating higher profits in countries with lower corporate tax rates and reporting more expenses in countries with higher rates.

Save as Much as You Can in Taxes With doola

Reducing tax bills is no longer only attractive to corporations. Small businesses are also looking for ways to save more in taxes.

However, with complex tax laws and regulations, it can be challenging to navigate the tax landscape on your own. This is where doola comes in.

Since choosing the right type of business formation affects your tax obligations, doola helps you evaluate all the options, from sole proprietorships to LLCs and C-Corp, and choose the formation that will be most beneficial for your specific business.

But choosing the right formation is just the start. Our Business Formation Services handle your business’s incorporation with the state on your behalf.

We prepare your Articles of Organization and then submit your application with proper documentation for swift approval.

But our services don’t end there — we also handle all aspects of tax filing on behalf of our clients.

Our experienced professionals will ensure that all required forms are correctly filled out and submitted in a timely manner to avoid any penalties or audits by taxing authorities.

We also offer Expert Tax Advisory Services to help businesses legally reduce their taxable income through various strategies, such as claiming deductions and credits, deferring income recognition, and utilizing tax breaks specific to your industry.

Schedule a free consultation with one of our experts to know more about doola can help your business grow!