To most people, the end of the year means holiday parties and spending time with friends and family. To business owners, this means tax planning.
Year-end tax planning traditionally tends to send people into a frenzy as they try to find all sorts of ways to pay less money to Uncle Sam. If you are a business owner, it's very likely that you've already left your accountant several voicemails and are scrambling to get your Quickbooks in order before January.
To make matters worse, your favorite financial and business websites offer all kinds of dubious advice on ways to cut your taxes.
These articles promise to get you the most bang for your buck and typically cite giving to charity and making some big purchase that qualifies as a business expense in order to ease how much you'll have to pay in taxes.
Truth be told, all the end-of-year tax planning hoopla can get a little out of hand. Aside from all the conflicting information out there, tax and employment laws are always changing (Affordable Care Act, anyone?), making the perfect recipe for one big tax mess and a whole lot of anxiety.
But, relax. Small business owners don't have to file any paperwork with the IRS nor pay any taxes by Dec. 31. Year-end tax planning has more to do with getting prepared for the April 15 deadline of the following year. We'll explain how to do it, and what, if anything, you can do to lower your tax burden.
Debunking End-of-year Tax Deduction Myths
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.
Year-end Tax Schemes
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:
- Identity Theft: This is when someone uses your personal information to commit tax fraud. The IRS has a special section just for identity protection to keep you safe.
- Telephone Scams: Telephone calls where people pretending to be from the IRS have become more common. Callers typically tell victims that they either owe money or have a large refund waiting for them. The more pervasive calls threaten with arrest or revoking of the victim's driver's license. If this happens, the IRS suggests that you call the agency directly before taking any other action.
- Hiding Income Offshore: While there are legal reasons to keep some money abroad, many scams pop up this time of year telling you to move your money offshore in order to alleviate your tax payment. There's another term for this that is very frowned upon by the IRS: tax evasion.
- Impersonation of Charitable Organization: This is extremely common since many people think giving to charity will ease their tax payments. Always check out the credentials of any charity.
- False Income, Expenses or Exemptions: People may be encouraged to inflate income, expenses or exemptions for the year in an effort to lessen their tax payments. This is considered a crime and in some cases can result in prosecution.
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.
How to Make End-of-year Tax Planning Easier
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.
Author's Note: How Year-end Business Taxes Work
I, for one, never want to play guessing games with my tax situation. That's why I got myself a good accountant. I would much rather prepare throughout the year than wait until the last minute when I can't do much. Furthermore, my accountant is better versed in tax law than I'll ever be.
While getting an accountant may seem like an expense, I assure you they practically pay for themselves. Not just with the tax savings they can get you, but also by giving you newfound time you can use to make more money.
- Dixon Hughes Goodman. "2014 Year-End Tax Planning for Business." Dixon Hughes Goodman Tax Alert. November 2014 (Dec. 11, 2014) http://www.dhgllp.com/res_pubs/2014-Year-End-Tax-Planning-Business.pdf
- Internal Revenue Service. "IRS Releases the "Dirty Dozen" Tax Scams for 2014; Identity Theft, Phone Scams Lead List." June 2014. (Dec. 11, 2014) http://www.irs.gov/pub/irs-pdf/p1.pdf
- Internal Revenue Service. "Topic 506 - Charitable Contributions." June 2014. (Dec. 9, 2014) http://www.irs.gov/taxtopics/tc506.html
- Jones Day. "Deciding Whether to Play or Pay Under the Affordable Care Act." March 2013. (Dec. 11, 2014) http://www.jonesday.com/deciding_whether_to_play_or_pay/
- Nisall, Eric J. Accountant and Owner of Accountlancer. Personal interview. (Dec. 4, 2014) http://www.accountlancer.com
- Parish, Steve. "Four Year-End Tax Planning Mistakes to Avoid." Forbes. Nov. 17 2014. (Dec. 9, 2014) http://www.forbes.com/sites/steveparrish/2014/11/17/4-year-end-business-tax-planning-mistakes-to-avoid/