At this time of year, it’s important for business owners to understand how your Net Profits (or Losses) flow through to your personal tax returns. Here are a few tips to help you connect the dots from your business return to your personal tax return.
Do you understand how your corporate tax return will flow into your personal tax return? Most small businesses that I work with, including dental and medical practices, are filing their tax returns as an S corporation. This election allows the owners to pass company income, losses, deductions and credits on to their personal returns. The benefits of electing to file as a sub-chapter S corporation are that taxes are assessed at the individual tax rate which can avoid double taxation on company income.
How will Net Income or Net Loss be reported on your personal return? Once your CPA finishes your corporate return, have him/her take some time to explain the highlights of the corporate return. Be sure you understand how the profit or loss is carried over to your personal return. Some other questions to ask your CPA: How will Owner Distributions be reported (or not reported) on your personal return? Do you have a loss carry forward from previous years and how does that affect your personal tax situation? A loss carry forward can minimize or even eliminate your tax liability, by reducing your taxable income. This is something that can be applied to your income for multiple years as well.
Is your CPA planning to apply a Section 179? An area of weakness I often see is that the owner is familiar with understanding the Profit and Loss statement, but rarely reviews the Balance Sheet. Have your CPA explain the items on the Balance Sheet that can affect your tax return. If you bought fixed assets, ask about a Section 179. This is a tax strategy that is often used to reduce your tax liability, by claiming big ticket items (equipment purchases) as one time deductions. Ask questions; what is the benefit of taking a one-time deduction as an expense over depreciating it for so many years? Is taking a 179 Deduction a dollar for dollar reduction of your taxable income on your Profit and Loss?
One more topic to review with your CPA—Are you filing quarterly tax estimated payments? If not, why not? Paying your tax liabilities quarterly will not only help with your cash flow, but will give you some peace of mind knowing what your tax liabilities are throughout the year and not being shocked in April when your personal returns are completed. Did you have to file an extension?
If you had to file an extension, was that because you dragged your feet or did your CPA run out of time? Either way, what’s the expectation now? Will you still be able to meet filing your personal tax return by the 15th of April? Will there be a penalty involved? Cash Flow Forecasting—do you know how to project your tax estimates into the future for this time next year?
Once you have both your corporate and your personal returns ready and you know what your tax liability is going to be, start focusing on the upcoming year. By using cash flow forecasting, this time next year, you will have paid the majority of your taxes and shouldn’t have any big surprises for April 15th, 2016!
Call Centennial (misspell) Revenue Management today to schedule a consultation. Debra Robinson can help you start planning now to take the stress out of tax time next year. Call Debra today at 303.835.7992 or email her at firstname.lastname@example.org for more information.