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You may be in the unfortunate position of facing a large year-end tax bill. While it is probably too late to reduce the amount you immediately owe, it’s never too early to prepare your business to avoid a similar situation next year.
First, you have to understand whether or not you are accounting on an accrual or cash basis. As with most things in the world of accounting, there are plenty of intricacies we could dive into here. But as a point of general understanding cash-basis systems mark income and expenses every time money is exchanged, while accrual accounting marks income and expenses according to when the goods or services are billed, whether or not money is exchanged now or later. Most of the tax strategies listed below will only apply if you are accounting on a cash basis.
Assess and adjust your withholding amount every time your financial situation changes. If your company just landed a huge account and is getting a major influx of revenue, it is wise to re-assess your withholding strategy. Making sure that sufficient funds have been set aside through the course of the year is a key to avoiding a nasty year-end surprise.
You need to understand your cash flow for many reasons. This helps you handle day-to-day operations, and it also is key to managing your annual tax bill. If you expect to generate more revenue next year than in the current year, you can maximize next year’s deductions in a potentially higher tax bracket by delaying any big purchases until that higher income year. This ensures the expense is attributed to the year when the deduction will have a greater impact. In short, you want to increase expenses in the years you have the highest revenue, and vice-versa.
When you are calculating annual expenses, depreciation is a line-item that can provide plenty of valuable deductions. If you are claiming significant deductions for depreciation, check with an accountant to see if any of your items qualify for a first-year deduction instead of a spread-out depreciation allowance.
Retirement plans can be established to shelter income from taxes. In addition to the great tax benefits, retirement plans are smart and valuable investments on their own.
Most employers want to recognize and adequately compensate their employees. But we are looking at ways to decrease expenses, not increase them. If you are considering giving out raises at the end of the year, you can instead opt to increase your contribution to employees' benefits, like healthcare, retirement, and more. By increasing those benefits rather than increasing salary, you can often avoid additional payroll tax obligations.
The IRS will review returns up to three years old. That means you have three years to get a second opinion that could save you thousands of dollars. The only thing you have to risk is the accountant's fee. If they don't find any additional deductions, you don't have to submit to the IRS.
IRS Form 9465 provides a process for businesses to apply for a tax payment installment plan. This is a useful option if you have incurred a large tax bill that can't be lessened through any of the previous strategies. There are fees associated with the installment plan, and a significant associated risk. If you are accepted into a payment plan and subsequently default, then a lien may be placed on your assets.
Don't count out the benefits of working with a pro when it comes to any area of your business. A licensed accountant or financial advisor should be able to help you manage cash flow to be ready for year-end taxes. When it comes to filing those taxes, nothing is simpler and more thorough than Tax, Pay & File from Future Systems. Learn more today and you may never have to deal with the IRS ever again!