Sometimes, personal taxes can be, well, complicated. But, as you likely know, a lot more may be involved in reporting business taxes – including your sales, your employees, new equipment purchases and a variety of other details. It just stands to reason, if you own a small business, tax time can be a challenge. For any operation, large or small, it all comes down to this: every company’s livelihood is at least partially dependent on its ability to minimize its tax liability, while at the same time meeting IRS requirements.
Admittedly, taxes are not a particularly enjoyable or interesting topic, but it’s undeniable that they are a part of any business owner’s life. There is a very real upside, though – being smart about your corporate taxes can increase your income. Not to mention help you avoid legal issues.
Regardless of the business you’re in, these tips can help:
Keep tax and financial documents for at least seven years:
If you’re ever audited, the IRS is going to want complete and accurate records. Remember that you always need to support any deductions you might claim with documentation. Obviously, keeping good, organized records is necessary for any small business. Not only does it help you develop discipline in other areas, you also avoid having to perform a panic reconstruction of records at a later date.
Know your deadlines:
This isn’t as cut and dried as paying your personal taxes – in other words, it isn’t all about April 15th. While the majority of business entities still file on “tax day,” C-corporations are required to file within 10 weeks after the fiscal year ends, which is normally December 31st.
Understand your loans:
The IRS doesn’t classify most business loans as income, but the interest paid on loans usually is deductible. Once again, keeping accurate records regarding the use of any loans can make a big difference in your return. The IRS needs to understand whether it was for equipment or to finance some other activity.
Know the different types of audits: There are several types of audits and some are more intimidating than others.
- Office audit: Usually this one is a no-brainer. It is a request to visit your local IRS office to resolve some (usually minor) discrepancy.
- Correspondence audit: Again, not a big deal; there’s probably one specific document you’ll need to mail or fax.
- Field audit: These are more involved – and they tend to be very thorough. The audit is conducted at your place of business.
- Criminal investigation audit: This is the big one. First step – consult your lawyer. You’re suspected of tax evasion.
Pay your quarterly tax bill:
Here is a common mistake to avoid. If, like most people, you have an employer, your taxes are regularly taken out of your paycheck. If you’re self-employed, however, you’re required to estimate your tax each quarter and pay it. And by the way, in boom times, it’s possible to end up with a bigger tax bill than you can handle in a single payment. To avoid late payment penalties, be sure to set aside a portion of your profit each month in anticipation of paying higher-than-usual quarterly taxes.
Prepare early:
It is a fair assumption that most tax filers wait until the last minute. However, if you’re expecting a refund, this can be the worst time to file because the IRS is overwhelmed with all the returns that pour in. On the other hand, this can also be the best time to avoid an audit. Preparing your tax return early leaves you time to find any missing documents and handle any questions the IRS may ask.
Get help:
Depending on the complexity of your business’s finances, hiring an expert to prepare your tax return might be a good idea or you can use free business counseling offered by the SBA. In theory, the money you spend on expert assistance ought to result in a smaller tax burden. It’s also helpful if any legal issues arise.
Never use employee payroll taxes to pay business expenses:
When you withhold taxes, send them directly to the IRS! Unless, of course, your aim is to upset them; in that case, this is an excellent way to do it.
As any profitable business knows, taxes can constitute a significant expense. It certainly makes sense to minimize that exposure, but the wrong actions can put your entire operation in jeopardy. Always consult a tax professional if you have any questions or concerns regarding your business’s tax situation.
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