Your business might only file taxes once a year, but you should make tax planning a year-round effort. Although you feel the effect of taxes on Tax Day, your tax bill is the result of choices you made during the entire tax year. Here are four important tax tips that every small business owner should be aware of:
1. Make Estimated Payments Correctly
If you need to file quarterly, the IRS expects you to make a sincere effort to estimate your payments. For instance, you might base your payments on the previous year’s total liability or on the current year’s estimated liability. You can choose to use the smaller amount of 90 percent of this year’s expected liability or 100 percent of last year. If you’re under by more than $1,000, you may have to pay a penalty. If your company’s income is modest, the penalty may not be that large, but it’s certainly an avoidable one.
2. Plan to Have Funds to Pay
If you’re a little off on your estimated taxes, you might not suffer that much. If you don’t have the funds to pay the difference on Tax Day, you should always file your taxes anyway and then communicate with the IRS. However, you’re likely to get slapped with penalties and interest if you pay late or create a payment plan. Some accountants suggest creating a separate account that is used solely to save money for taxes.
You might also consider small business loans that give you the funds that you need to take care of your tax debt and other expenses. The interest that you pay to service your loans is typically deductible, so this option may be cheaper than having to suffer from penalties for late payments to the IRS. Some accountants believe that paying and filing on time may also reduce the risk of audits.
- Consult With a Tax Professional Early
Tax professionals can do more for you than just make sure that you’ve filled out all your tax forms correctly. They can also give you advice about certain deductions and credits that might lower your liability. The impact of these tax deductions could cause you to make different business decisions than you would have otherwise.
For instance, you might decide to buy new computers in December instead of waiting until February like you planned. You can use the expense as a deduction for the next year. Under Section 179, some property can entirely be written off for the tax year it was purchased in. These kinds of deductions really help if you didn’t pay enough estimated taxes. If you’re worried about finding funding for purchases, you can apply for a line of credit. That way, you can access credit when you need it most.
- Keep Excellent Tax Records
You may need receipts for some deductions and not need them for other ones. For example, you might just need a log to keep track of vehicle mileage. However, you certainly need to keep records of your expenses to explain them if you get audited.
How do you know which records you should keep and how to keep them? An experienced bookkeeper or tax accountant can help you get organized. Or, another alternative is to use a good accounting software.
Get Prepared and Stay Prepared for Tax Day
As Tax Day draws near, no business owner ever regrets the preparation they did in advance. Keeping up with estimated payments, setting funds aside to make those payments and maintaining good records is the first step to stress-free taxes. An experienced tax professional can also help you avoid problems with your actual filing. Plus, they can help you make decisions that will have a beneficial impact on your final tax bill.