Understand How Corporate Taxes Affect Your Personal Return

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 tips to help you connect the dots from your business return to your personal tax return.

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.

Know how 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.

Your Balance Sheet can affect your Tax Return, e.g., if you purchased fixed assets, ask about a Section 179

An area of weakness I often see is that the business 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?

Consider filing quarterly tax estimated payments

Are you filing quarterly tax payments, and 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.

Be prepared if you filed 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— 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, 2020!

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