Instead of thinking of April 15 as the start of the new tax year, starting thinking taxes from the beginning. Planning ahead for the entire year can alleviate many tax headaches and stress. It will most likely save you money as well. As always the best thing to do is to find a CPA you trust and get to know them well. Along with your lawyer, they are a crucial part of running your business successfully.
10 Tax Mistakes Business Owners Make
Business owners have to plan ahead for taxes even more so because they must pay taxes quarterly. Here is a list of some common, and avoidable tax mistakes.
1. Talking To The Tax Preparer When The Tax Year Is Over
The best time to prepare for taxes is at the beginning of the year. When it comes to taxes preparation is everything. It keeps you from making mistakes. By talking to your tax preparer you are able to find out what tax deductions for which you might be eligible for. The people who do not talk to their tax preparer are the ones who are the most stressed when it comes to tax time.
Tax preparers know how to help find the best way for you to structure your business. They can tell you how to distribute the income from your business as well as when it is best to purchase equipment. They can also help you prepare for retirement. They are trained to know this information and they keep their skills up to date.
At the end of the year it is too late to be able to take deductions you did not know about. You would have known had you talked to your tax preparer at the start of the year. A tax preparer cannot help you take deductions after the stroke of midnight on December 31st.
An example of this is a business that plans on buying new equipment. The tax preparer can tell the business owner whether he should buy the equipment new or lease it. He can also tell the business owner about the "bonus" depreciation that the United States Revenue Department is offering. The IRS is offering this a way to help stimulate the economy. If the business owner did not discuss this with his tax preparer he might make the wrong decision and end up losing money,
When you sit down with your tax preparer to complete your taxes it is also a good time to prepare for the next year. Take advantage of this opportunity while you are in front of them to plan ahead.
While tax day is not anyone's favorite holiday waiting until the last minute does not help alleviate the pain you feel. Benjamin Franklin once said that nothing is sure except death and taxes. So why wait until the last minute.
If you prepare your own tax return, waiting to the last minute and rushing could cause mistakes that cost you money. If you use a tax preparer, the preparer can file an extension until they receive all of the information needed in order to complete your return.
Filing taxes early has a couple of benefits. One is that if you are expecting a refund you will receive it a lot sooner. The other is the peace of mind you get from knowing that the year’s tax season is behind you.
If you are going to get a refund waiting simply ties your money up with the IRS as you will not get it until you have filed your return. If you owe money filing an extension will not help. If you owe money the IRS expects your check when you file the extension. Failing to pay the estimated tax liability when you file the extension can result in penalties and interest charged on any remaining balance.
3. Forgetting to make an Individual Retirement Account (IRA) contribution by April 15
The IRS allows taxpayers to make IRA contributions all the up to April 15. However, if you extend the filing date this does not extend the IRA contribution date. If you forget to contribute you miss out on the potential tax deduction. This is a crucial deduction and benefit to your future retirement that can’t be missed.
4. Not budgeting for tax payments
The beginning of the year can be expensive! Besides all of the bills due for the holiday gifts and celebrations, you owe money to Uncle Sam as well. The last estimated tax payment date for the previous year is January 15. In addition the first quarterly payment for the current year is due April 15. Be sure to budget for not only the taxes but the fees for the tax preparation. Paying them late will cost you the payment and then some as the IRS charges a late fee + interest.
5. Not “bunching” your itemized deductions
When you prepare for taxes your tax preparer will be able to itemize all of your deductions so that you get the largest tax break possible. The tax preparer can help you get the best out of your deductions. For example if your deductions are so close to the standard deduction your tax preparer can help you so that you can claim two years of deductions in one year. Let’s say that you pay your property taxes every year, if you time your payments in a certain way you can claim two payments in one year. All you have to do is pay the property taxes for 2013 on January 1 and the property taxes for 2014 on December 31, you will get to claim both of them on one tax return.
Same goes for charitable deductions. Completed in the same way as the property taxes you can claim two in one year. One year claim the double deductions and the next year just claim the standard deduction. That is just one tip that your tax preparer can help you with.
6. Forgetting about charitable deductions that are non-cash
Many people either forget or don’t realize that many things like food donations, toy donations to needy children and clothes to those less fortunate are considered charitable donations and can be deducted. Start spring cleaning early and donate the unused items. It will make you feel more than good, it will help save you some money.
7. Forgetting About Sales Tax On Large Purchases
Did you purchase a car, boat or RV this year? How about materials for renovating or adding onto the house? Many people don’t realize that the sales tax on such things is tax-deductible. The IRS allows for either a state income tax or state sales tax paid as an itemized deduction. An estimate of the sales tax paid based on income and state sales tax rate is available from the IRS but they also allow for increases in this calculation paid on certain things. This can be even more important for people living in states with high sales tax and either no income tax or a low income tax.
8. Forgetting About Last Year’s Return
Those who complete their own tax returns going over them once and thinking they are completed could be a mistake. You should actually look over the previous year’s tax return each year when you prepare the current year’s tax return. You may have capital losses or a net operating loss that you forgot or missed. If you miss this and do not carry over your losses you could lose a lot of money, and no one wants to lose money.
If you do your own taxes it is important that you keep meticulous records. Missing one little item could cost you thousands of dollars. When you change tax preparers be sure to give the new preparer copies of previous year’s tax returns. That way the new tax preparer will not miss anything that should be carried over.
Self Employed Deductions
9. The Self-employed Health Insurance Deduction
A tax preparer would be able to tell a business owner that buying health insurance for themselves and their family will help to reduce federal income tax. Not only reducing federal income taxes but self employment tax as well. The medical expense deduction is reduced by 7.5% of adjusted gross income, so if health insurance premiums aren’t deducted on the right line of a return, the taxpayer will be paying too much tax!
10. Keeping Incomplete Records
Get organized for tax time. Do not wait until the first of the year to get the previous year’s paper work together. Getting organized is not hard. Simply buy an accordion file at the start of each year. Not only will you be prepared but you will have a place to store all of the receipts along with the tax return that you have to keep. In the file you can put all of your receipts that way you will not forget anything and they will all be in one place.
You can dedicate a section to each of the expenses. Then when you get your W-2's or 1099s place them in the folder, hand it to the tax preparer and your taxes are completed; time to get ready for the next year’s return. You will be feeling great knowing your taxes are completed while everyone else is stressing over getting their taxes done. Maybe seeing you so relaxed will encourage them to get organized and prepare ahead of time.