How Year-end Business Taxes Work

Have you noticed how many sources give the same generic advice when it comes to end-of-year tax deductions? They usually say to give to charity and make a big purchase that counts as a business expense.

While this may seem like a quick fix, the reality is these deductions may not be all they are cracked up to be. In fact, according to Eric J. Nisall, a South Florida-based accountant who specializes in small business, it's never that simple.

Take giving to charity for example. Giving to charity is a bad idea if you're only doing it for tax purposes. "First of all, you can only take deductions that you itemize on a Form 1040, Schedule A. Second, it doesn't count if you're filing a Schedule C as a sole proprietor or a single member limited liability company," says Nisall.

The IRS echoes this statement and adds that in order to be deductible, charitable contributions must also be made to qualified organizations, not individuals.

Nisall further explains, "Even if you can deduct your charitable contributions the most you'll get back is $0.39 for every dollar you spend, so if your only intent is to relieve your tax burden, you're better off keeping the money to pay your tax bill."

What about business expenses? Can business owners get a nice tax break if they make a big business purchase at the end of the year? Only if you actually need the item you are purchasing.

"Anyone who tells you to spend money to get a tax write-off is giving bad advice," says Nisall. "If you have no use for the items, then you're just wasting money."

Bottom line: Tax planning is a year-long process and Nisall says there's almost nothing you can do to improve your situation if you wait until December.

However, some folks will tell you otherwise, so here are some scams to watch out for.

As with any seemingly hectic tax time, tax schemes are in full swing at the end of the year looking to prey on those who are desperate to alleviate what they will owe in taxes for the year.

The first step in avoiding these schemes is to keep your emotions in check. Remember, there isn't much you can do at this point anyway, so acting out of desperation will only make you more likely to fall into a trap.

Even so, sometimes smart, level-headed people become victims of scams. So the second step would be to educate yourself on common end-of-year tax scams.

According to the IRS the most common scams for 2014 include:

For more on common tax scams make sure to read the IRS publication, Dirty Dozen Tax Scams for 2014.

Next, we'll talk about some things that might actually help you with your tax liabilities in the New Year.

The mistake most small business owners make is that they wait until Dec. 1 to take a look at their tax situation for the year. Sure, tax planning can be done at the last second, but why put yourself through the hassle? With that being said, there are things you can do moving forward to ease the end-of-year tax stress.

Don't make business decisions just for the tax breaks: On the previous page we mentioned how you shouldn't make big business purchases you don't need just for the tax break. The same applies when new laws come into play.

In a Forbes article, attorney and longtime financial planner, Steve Parish pointed out how many businesses are scrambling to look smaller in the eyes of the IRS in light of new health care laws. These new laws mandate that companies with more than 50 full-time employees offer health care to their workers and children up to the age of 26. Failure to comply results in penalties for the employer [source: Jones Day].

While it may seem advantageous to keep your company at under 50 employees tax-wise, the reality remains that if more employees bring in more revenue, then forget the tax savings and hire the number of people you really need. If having more employees increases your income, then is it really so bad to be treated as a bigger company?

Plan throughout the year: A good accountant will keep you in the loop all year round so you can adjust for upcoming tax situations. He or she will also be able to advise you on new credits and deductions you can take and old ones that have expired, as well as how to depreciate existing equipment and software [source: Dixon Hughes Goodman].

Accountants will also know how to handle complex tax situations. For example, if you have seasonal workers, on-call employees or student workers an accountant would be able to determine your liability for the employer mandate under new health care laws.

Consider maximizing your own retirement funds. The IRS 401(k) limit for 2014 is $17,500, with a catch-up amount of $5,500 for those over age 50. This money is tax-free until withdrawn.

The truth is tax-planning is a year-round endeavor for businesses. Rather than waiting until the last minute, work with your finances throughout the year.