One of the responsibilities of running a business is attending to taxes. You have to do it; there’s no choice. But the payoff for smart actions is keeping more of your profits. Admittedly, handling taxes isn’t always easy. Here are the five top tax concerns of small business owners and what you can do about them:
1. Having the money to pay taxes due
The price of success is higher taxes. And starting on 2013 returns, there are a number of new taxes, limitations, and higher rates that apply to so-called “high income taxpayers.” The challenge for small business owners who’ve been profitable is having the cash available to pay the tax bill. In fact, according to a recent pulse survey of small business owners conducted by The Hartford, this is the top tax concern of those surveyed. The vast majority of small businesses are S corporations, partnerships, limited liability companies, or sole proprietorships; owners report their share of business profits on their personal returns and pay their own taxes.
What to do: Make sure to pay sufficient estimated taxes to avoid penalties. For simplicity, you can peg this year’s estimated taxes to last year’s tax bill. As long as you pay this year 100% of the tax bill for last year (or 110% if your adjusted gross income last year was $150,000 or more, or $75,000 if married filing separately), you won’t owe any penalty, even if you’re more profitable this year than last year and you still owe money when you file your return.
The real challenge, of course, is having the cash to pay estimated taxes. This requires you to set aside funds needed for tax payments; a separate bank account for this purpose is helpful. S corporation shareholders can avoid paying estimated taxes by adjusting the income tax withholding on their salary to cover their projected tax bill for the year.
2. Keeping required records
You must have good records to know what items are deductible and you need these records to back you up in case the IRS questions your return. In some instances, such as with travel and entertainment expenses, the tax law specifically denies any deduction without proper records.
What to do: Create a recordkeeping system to track business expenses. Retain paper receipts, invoices, credit card statements, etc. to help you prove entitlement to deductions you claim.
You can simplify some recordkeeping with apps for your smartphone or other mobile device. For example, there are apps that can be used to record the necessary information about travel and entertainment costs, as well as allowing you to take photos of receipts.
3. Missing out on tax saving opportunities
The tax law changes annually due to new legislation, court decisions, and IRS pronouncements. In order to optimize your tax savings, you have to know what’s new and which breaks apply to you.
What to do: Part of your responsibility as a business owner is knowing about the tax breaks you can use, so plan to spend some time throughout the year keeping up with tax changes. If you wait until you meet with your tax professional at tax time it may be too late to take action that could benefit you tax-wise. For example, if you’re profitable and want to set up a qualified retirement plan, the paperwork must be signed by the end of the year in most cases.
- Pay attention to tax news in the media.
- Stay in touch with your tax professional throughout the year.
- Consider reading tax publications such as my book, J.K. Lasser’s Small Business Taxes, to discover strategies you can use in your business to save on taxes.
4. Dealing with uncertainty
Business owners like to plan ahead, but expiring tax rules and proposals of tax reform make it difficult to predict what taxes will be. For example, the tax credit that encourages businesses to invest in research and development was created in 1985 but has expired eight times (most recently on December 31, 2013) and been extended 14 times. How can owners budget with tax breaks in mind?
What to do: Depending on the tax break involved, it may pay to delay action until the tax law is settled. For example, the Sec. 179 deduction for the purchase of equipment and machinery declined from a write-off of up to $500,000 in 2013 to $25,000 in 2014; however, a higher limit may be restored for 2014. Businesses that want to utilize this break may want to wait until Congress fixes the dollar limit for 2014 and beyond.
In other instances, you have to make plans that are tax-neutral. If you need equipment, make a business decision to buy it regardless of the tax breaks that may apply.
You may want to check out this article to learn more about some of the business tax credits that could be available to you.
5. Fearing an audit
While the odds of being targeted by the IRS for review are very low, if you’re the unfortunate one selected it can cost you significant time and money—even if you ultimately prevail by convincing the government that the tax positions on your return were correct. It takes time to gather the necessary records, such as paper receipts and online reports. It takes time to meet with a tax professional who will represent you. And it takes money to pay the professional for audit services.
What to do: While there’s no way to absolutely audit-proof your return, there are steps you can take to minimize an IRS audit.
- Report all business income unless the tax law lets you exclude it. Cash-intensive businesses attract greater IRS scrutiny and the government is hip to hidden income (see the IRS’ audit technique guide on cash intensive businesses).
- Work with a reputable tax professional; avoid anyone who makes unreasonable promises about refunds, suggests hiding income, and other questionable activities. The IRS is hot on the trail of these tax pros, and if they get caught, their clients likely will be audited.
While taxes are daunting because of complexity and cost, the time you devote to dealing with them can pay off. You’ll have more after-tax income and be confident that you’ve done your best to meet your tax responsibilities and minimize your audit exposure.