If you're the owner of a small business that is on the tail end of a banner sales season, you may be facing a painful January quarterly tax payment unless you can reduce your taxable income by the end of the calendar year. For those who have significantly underestimated their taxes, back taxes and penalties, April 15 could hamstring your business's operations for the rest of the year. What can you do to minimize your tax burden while keeping as much profit invested in your business as possible? Read on for some tax deductions you may be able to take advantage of before the New Year, as well as what to do if these deductions still aren't enough to offset your tax liabilities.
What tax deductions are available to a high sales volume business?
While increased sales mean more money in the coffers, they can also mean more expenses -- which can give you some opportunities to take little-used deductions against your business's taxable income. You'll want to scour your monthly ledgers for any unreimbursed expenses that can provide you a dollar-for-dollar deduction against profit.
If you've invested in capital assets like new computers, office equipment, or a new company vehicle, you may also opt to deduct (rather than depreciate) these expenses to give you the biggest bang for your buck this year. Although you won't be able to then take advantage of the regular, smaller tax deduction provided by the depreciation schedule, your larger deduction may be enough to bump your tax owed down to a level where no penalty will be assessed.
Another tax deduction that may be available will require you to carefully evaluate your vehicle's mileage. If you have a dedicated company vehicle and use another for personal errands, this task is easy -- you'll need only to track the miles driven between January 1 and December 31 and multiply this number by 0.575. For those whose vehicles do double duty, tracking business miles driven can be tougher. Fortunately, one of any number of online applications can allow you to access your day-by-day GPS tracking, which can often be enough to jog your memory as to where you were headed and how far you traveled. While tracking mileage can be tedious, the generous federal reimbursement rate can make the effort well worthwhile when it comes time to pay your business's final tax bill.
What can you do to reduce your personal tax liability?
In addition to the taxes paid through your business, you'll also be responsible for federal and state income taxes on the salary and benefits you receive as a business owner. Fortunately, the IRS permits you to shield a substantial amount of income as a self-employed person through a Simplified Employee Pension (SEP) or Savings Incentive Match Plan For Employees (SIMPLE IRA), as well as a traditional 401(k) plan you establish for yourself and any employees.
If you opt for an SEP plan, you'll be able to put away a quarter of your salary up to the $200,000 mark (or a maximum of $53,000 in contributions per year). This can often be enough to reduce your top marginal tax bracket, minimizing the amount of your personal income subject to a higher rate of tax. For those who contribute to a SIMPLE IRA instead, you'll be able to save $12,500 of your income (plus an additional 2 to 3 percent over this amount) tax-free each year. The right choice will generally depend on your total household income and other fixed expenses -- but you may want to do some quick calculations to see how much of an instant return (via lower taxes) you'll be able to realize when putting money away into retirement.
When do you need a tax attorney?
Even if you're able to take advantage of some of these deductions, they may not lower your taxable income enough to prevent underpayment penalties from being assessed at the time you file. If your preliminary calculations still show that your business will owe a sizable sum upon the filing of your 2015 taxes, you'll want to consult a tax attorney to determine your options.
This attorney should be able to help you negotiate with the IRS and your state's department of revenue to reduce (or even eliminate) penalties under various safe harbor provisions; in some cases, even lowering the total amount of tax owed. Although you'll likely pay a retainer and hourly fee for any legal assistance provided, this can be money well spent if your attorney is able to successfully negotiate your tax bill down to a more manageable rate.
For more information, contact a professional like Wiesner & Frackowiak, LC.