A tax shelter refers to a vehicle which is used by organizations or individuals for reducing their taxable income and, eventually, tax liabilities. The creation of these tax shelters is through government for promoting a particular desired behaviour among individuals or entities with a view to reduce their tax burden and boost the economy. No, all tax shelters are not illegal. Yes, a corporation can create a legal tax shelter like employer-sponsored 401(k) retirement plans and municipal bonds. Under the Economic Substance doctrine, federal income tax benefits in respect of a transaction are not allowed if such transaction does not possess economic substance or business purpose like creating offshore companies to evade payment of taxes to federal or state governments.
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