Do you have an end of year tax strategy? If not, it’s time to get to work. Business owners tend to think of taxes as something that matters after the New Year, as April rolls around. But the reality is that with a bit of advanced planning, it’s possible to pay less to Uncle Sam and keep more money on hand to invest back into your business. Yet business taxes can be complex, and a number of myths and misconceptions leave owners at a potential disadvantage. Here’s a closer look at five of the biggest end of year tax myths – debunked – and what you can do to come out ahead with your 2015 tax planning.
Spend to Save
One of the most common end of year tax myths is that businesses should spend everything possible to reduce their profits. Expenses reduce your taxable income, so they can help minimize the taxes that you pay. Yet it’s important to ask whether you’re spending smartly. If there’s equipment, software, services or other items that you’d absolutely invest in, it makes sense to purchase them in the current tax year to get the discount.
But spending just to spend without a business justification or spending over budget that puts you into debt may not be a smart long-term solution. Ask yourself whether your spending is really moving your business forward; if so, it can be a good strategy for reducing your tax bill.
Tax Payments Aren’t Due Until April
A misconception that can trip up newer business owners is the belief that all taxes are due in April. Businesses often need to make quarterly payments toward their tax debt in order to avoid penalties. There are a couple of ways to approach quarterly taxes.
One is to look at your previous year’s revenue and taxes – and base your estimated payments on those. It’s also wise to consider consulting a professional if you’re newly in business or have experienced a major jump in revenues. Paying quarterly taxes on time has two benefits. The first is avoiding fees, penalties and troubles with the IRS. The second is simple: you won’t be scrambling for liquid funds in the Spring to pay a large tax debt.
There’s No Point to Worrying Until it’s Time to File
Many businesses don’t think about taxes until they’re due to file. But taking this approach has two distinct downsides. The first is that consulting a tax professional or looking at your financial big picture early may reveal opportunities to save on your bill. Perhaps you want to make strategic purchases or contribute to a retirement plan? By planning ahead, it’s often possible to take steps to reduce your tax bill and advance your other professional or personal priorities.
The second is that by addressing your taxes early, you’re more likely to be organized and control costs. If you do your bookkeeping and tax prep early, you may even save money by taking advantage of better pricing or discounts for avoiding the tax rush. Think ahead to help minimize both your tax bill and preparation fees.
Claiming a Home Office Deduction is an Instant Audit
Nobody wants to be audited. In fact, many businesses avoid taking certain deductions in an effort to prevent an audit. But there are so many myths about various deductions or factors that “lead to an instant audit.” These misconceptions can cause conscientious business owners serious money from the bottom line.
Educating yourself about which deductions you are eligible to take and determining what documentation that you need on hand can yield significant results. If you’re confused and need more details, consult a tax professional or visit the IRS website’s Small Business Center. Being informed can help you maximize the legitimate deductions you take and eliminate high fees associated with last minute tax prep.
You Absolutely Must File by April 15th
Many individuals and businesses don’t realize that it’s possible to file for an extension. The IRS will normally grant individuals and businesses a filing extension until October 15th. However, there’s one important note. While the extension buys you time on filing, it doesn’t exempt you from paying on time.
Make sure that everything you owe will be paid by the end of the year – or by April 15th at the latest. Filing for an extension allows some additional time to get all of your paperwork in order. But paying late – even if you have an approved extension – can result in penalties and interest.
Have you experienced a situation where a common end of year tax myth has led you astray? How did you resolve it? Share your experience with other entrepreneurs in the comments below.