With April 15th fast approaching, now is a great time to start the prep work for filing your business taxes…for 2016. If you’ve waited until now to start preparing for your 2015 filing, you’ve already missed the proverbial buck. As with all other aspects of your business, organization, proper planning, and consistency are hugely important in making tax season as painless as possible. Follow the tips below to ensure that next year’s filing is smooth sailing.
1. Prepare early. Not surprisingly, this ranks top on our list. Procrastination will not serve you well when it comes to ensuring the documentation needed for your taxes are in order. Late filings and amendments can cost time and money. When you fail to file a Form 1120 (due March 15th for corporations and April 15th for LLCs), the corporation is charged a monthly penalty that's equal to 5 percent of any income tax that remains unpaid. In addition to the penalties for failing to file, the IRS can charge the corporation a separate penalty for paying taxes after the filing deadline. This penalty will increase the amount of tax that the corporation owes by one-half of a percent for each month it remains unpaid.
2. Be consistent. Ensure that your accounting and bookkeeping practices are accurate and occurring on a schedule. Make sure your expenses are reconciled, tracked and supported with receipts. At a minimum, spend time at least monthly to review your accounts—receivable, payable, credit card transactions, cash flow, etc. You also want to ensure that all expenses and revenues are booked according to the same system each month. Keep a depreciation schedule for all major asset purchases. Make sure the schedule includes: date put into service, original cost, accumulated depreciation up to this tax year, business use percentage (if applicable), recovery period of the asset. You’ll also need any Section 170 Expense taken in the first year of service.
3. Make sure you have W9s on file. If you’re paying anyone as an independent contractor and their total payment exceeds $600 (or the payment is for legal services), you’ll need to provide them with form 1099-MISC by January 31st.
4. Take advantage of your liabilities. If you’re on an accrual basis, make sure you accrue liabilities that occurred within the fiscal year to the take advantage of the tax deduction. If you’re on a cash basis, make sure you stroke a check for any outstanding liabilities prior to year-end to reduce your profit.
5. Be mindful of state apportionment. Have locations in multiple states? Then you need to prepare for state apportionment. Make sure you’re dividing your revenue, expenses, and payroll appropriately throughout the year.
6. Don’t forget about the ACA reporting requirements. Do you understand what your business’ requirements are under the Affordable Care Act (ACA)? Reporting was due to employees in January. The filing due to the IRS has been extended from March 31st to June 30th (if filing electronically) and from February 29th to May 31st (if not filing electronically). Penalties are in place this year for failure to report or provide adequate coverage. Make sure you look into the Small Business Health Care Tax Credit which is in place to help small businesses with low- and moderate-income workers afford the cost of coverage.
7. Avoid payroll mistakes. Payroll tax compliance is something that many small business owners struggle with. The financial consequences of getting it wrong aren’t pleasant either. Statistics show that approximately 40 percent of small businesses incur an average of $845 per year in IRS penalties (not to mention issues with the states in which they operate). To make sure that your payroll taxes are deposited correctly, consider outsourcing your payroll function. The benefits often far outweigh the fees.
8. Ensure your SUI rates are accurate. Each year, the state(s) mail out a new unemployment experience rating for the coming year. Make sure you update yours with your payroll team. Failure to do so can result in under paying and receiving a nice bill, with interest, or overpaying and jumping through the hoops required to get a refund back from the state.
9. It isn’t only the IRS. The IRS is only a piece of the tax puzzle. You’ll want to be mindful of other tax obligations like property, payroll, local taxes, excise tax, self-employment taxes, etc. Failure to meet deadlines can result in some serious fees.
10. If you’re not prepared, file an extension. If you haven’t heeded our advice and find yourself staring down a rapidly approaching deadline, probably the easiest way to avoid late-filing penalties is to file Form 7004 to obtain an extension of time to file. If the 7004 is filed by the original tax return filing deadline, you'll have an additional six months to file the Form 1120. However, the extension doesn't give you more time to pay the tax you owe, so it's best to estimate how much tax is owed and pay as much of it as possible by the original filing deadline to minimize late-payment penalties.
The beginning of the year is a great time to do a vital statistics check on your business. Many of the practices required to satisfy Uncle Sam will benefit the overall health of your business. So consider each of these pointers as time well spent. Happy tax planning!