Tax Preparation Tips

 

Tips to reduce the stress of tax season.

Have bookkeeping and accounting done correctly

Keep your books correct, current, and in order in accordance with Generally Accepted Accounting Principles.

Numbers from your accounting are used to prepare and file your business income tax return. Numbers on your business income tax return are used to prepare and file your individual income tax return. If your accounting is incorrect, all of your returns are also incorrect. You are also opening yourself up for an audit, possible penalties and interest on unpaid taxes, the need to potentially amend your past returns, in addition to simply not knowing the financial health of your business. If your numbers are off by too much, you may also be facing federal penalties and charges.

 It’s very important to make sure whoever is doing your bookkeeping and accounting knows what they are doing. In this case, what you pay is what you get, and there’s nothing worse than hiring a cheap bookkeeper and later finding out that your books need to be cleaned up by someone else for the entire year.

 In addition, don’t wait until the last moment to tackle your accounting. This is very stressful as you’re forced to race against looming deadlines.

 Hire a qualified, trained, and experienced bookkeeper / accountant, and keep your books current and reconciled throughout the year.

Tax filling deadlines

There are various deadlines when it comes to filing income tax returns, depending on the type of return being filed. Traditionally, the deadlines:

• March 15th for s-corporation and partnership income tax returns
• April 15th for individuals and C-Corporations

These deadlines may change because of holidays or emergencies, as was the case during years 1 and 2 of the pandemic.

If for any reason you cannot file your tax returns in time, you may request an extension. This gives you an additional 6 months to file.

However, it’s important to note that an extension to file is not an extension to pay taxes. If you owe for any given year, you still have to pay by the original deadline – even if you filed for an extension.

Knowing your filing deadlines and preparing ahead of time will save you a lot of stress and headache.

Tax Forms to file

In addition to having a grasp on deadlines, it’s important to know the names of the forms you will be filing in a given tax year.

Individual taxpayers usually file Form 1040.

If you own a Corporation (C-Corp), you will be filing Form 1120.

If your business is taxed as an S-Corporation (S-Corp), you will be filing Form 1120-S.

If your business is taxed as a partnership, you will be filing Form 1065.

There are many other forms – e.g., for trusts, nonprofits, payroll returns, various schedules, etc. You should familiarize yourself with each form, its filing deadline, and any schedules that need to be filed alongside the main form.

Tax Refund or Tax Bill

There’s nothing worse than an email from your CPA informing you that you owe money to the IRS or state. This is, however, completely avoidable if you are prepared.

Investigate whether you are paying enough in quarterly estimated tax payments, in addition to seeing whether your withholdings are sufficient, is very important. It will also be helpful to know your adjusted gross income.

A CPA can help you with all the above endeavors.

Tax deductions and credits

Most of us have heard of Child Tax Credits or even ERTC (employee retention tax credits). Most of us also know what does and does not constitute legitimate business expenses. But what about all the little details, rules, and exceptions?

Let’s say you need a car. Do you know there are special depreciation rules for large vehicles? Perhaps that extra tax write-off will be a deciding factor in your car purchase.

There are many types of other credits and deductions – such as Investment Tax Credits and Lifetime Learning Credits, or deductions such as home office, mortgage interest, and certain medical expenses.

It’s a good idea to read up on the opportunities available to you, or, even better, to hire a professional to analyze which credits and deductions you qualify for so you can cut your tax bill… Which brings us to the next topic.

Tax Planning

A tax plan, or tax reduction plan, is an analysis of your business and personal finances undertaken in order to see whether you can reduce your income tax liability (i.e. your tax bill). Not all tax professionals specialize in this type of analysis, so please choose wisely!

Typically, a certified public accountant (CPA) will analyze your accounting, past returns, current business need, personal needs, predicted tax liability to come up with various tax reduction strategies and tax saving projections.

These strategies can concern deductions, tax credits, legal entity optimization, implementing insurance structures or retirement structures, helping negate capital gains tax, etc.

Self file or hire a pro

You may want to save money by preparing their income tax returns using free or inexpensive tax software. Some people need to DIY everything – and hesitate to hand their tax returns over to a professional tax preparer. Some people simply cannot afford a paid preparer such as a CPA.

While you may conceivably take the DIY route for simple individual returns, business owners should never self-file. There is just too much on the line! Tax laws and tax forms are forever changing, there is just no way to keep up with all of it unless you are a seasoned tax professional or have years of experience with tax preparation.

In addition, self-filing will often lead to business owners overpaying taxes, as it is very difficult to have a thorough grasp on deductions, credits, or all the types of business expenses they business owners are able to deduct.

If the IRS catches a mistake on your return, you may be subject to penalties and interest, in addition to the costs of amending your tax returns.

Tax Preparer

A tax preparer must have a PTIN, will have a valid license, and should have experience in income tax prep. They would be familiar with both IRS rules but also with your business industry. Here the same rule applies, what you pay for is what you get.

Once you find a reliable tax pro, hang on to them. They are harder to find.

Share documents with Tax Preparer as soon as possible

There’s nothing worse than a client waiting until Tax Day to send over their documents. There’s no way for tax professionals to go over all your documents the day of, prepare and file your return.

It’s best to either send documents over as early as possible or request your tax preparer to file an extension. If an extension is filed, a good preparer will give you an estimate of any taxes you owe the IRS or states, so you can make a payment on time and avoid interest and penalties.

Types of income sources

It’s important to know where your taxable income is coming from and to see whether any taxes have already been withheld.

Employment income – this is income from performing various tasks for an employer, such as teaching, treating patients, baking a cake, or grooming other people’s pets. It is usually reported on form W-2.

Self-employment income – self-employed individuals or contractors have no employer and will receive self-employment income, usually reported on a 1099.

Partner dividends / income – if you own interest in a partnership, you might be receiving owner distributions. These are reported on form K-1.

Business income – this is revenue you receive from business activity, such as from a single or multi-member LLC, a partnership, an S-Corp, or a C-Corp. Your business can also be unincorporated (sole proprietorship).

Passive income / dividend income – income from sources such as investments, including income from rental real estate. Your role is limited to a purchase of an ownership interest in a business or purchasing a rental apartment. This type of income is treated differently that active income from sources like running a business, teaching, preparing tax returns, winning lawsuits, etc.

Capital gains – this is income you receive from selling certain items for a profit. These items can include real estate, stocks, bonds, digital currency, and other types of investments.

Retirement income – these are distributions from your retirement accounts (IRAs, 401Ks, 403Bs, etc.). Here contributions were usually tax deferred – meaning, you did not pay taxes when contributing into the account but will be paying taxes upon taking a distribution. There may also be mandatory minimums and age requirements for taking out distributions, just as there are typically contribution limits.

Rental income – profits from renting or managing real estate.

Inspect your return

Your tax return is an extremely important form that you are liable for – inspect both federal and state tax returns and always call your tax preparer if you have questions.