By Guest Contributor Amanda Han, CPA
It is scary to think that the average American loses more money to taxes each year than we do on food, clothing, and shelter combined. This year, we have been getting tons of calls from business owners and investors who feel they may have overpaid in taxes. The silver-lining with this is that as a result, more and more people are finally taking the steps necessary to stop the bleeding. More and more people are now finally taking the action steps needed to take control of protecting their bottom line from taxes with proactive tax planning.
So how exactly do you know if you are overpaying in taxes? The good news is…there are simple steps you can take to find out. To gauge your risk level of lost tax dollars, here are 8 signs to help you measure your risk potential:
Bad Sign: You do not have good bookkeeping systems in place: Ever heard of the saying “What gets measured gets managed”? It is just as important to know how much money is coming into your business monthly as it is to know how much is going out. If you are not keeping track of your monthly expenses, you can easily lose out on some legitimate tax deductions! Having accurate and timely financial information not only helps you to manage and grow your business…but it is also the foundation for an effective proactive tax plan and subsequent savings as well.
Bad Sign: If you do not meet with your tax advisor throughout the year, plan on paying higher taxes. For those of us who plan on paying the least amount of taxes possible, proactive tax planning happens year-round. If April 15th is the first time you are thinking about reducing taxes for last year, you have probably missed out on some big tax saving opportunities. Open the lines of communication with your tax advisor to ensure you are maximizing your tax deductions throughout the year. Some of the most significant and impactful tax saving opportunities need to be implemented as part of your business’ operational system.
Bad Sign: You have to explain your business operations to your tax preparer year after year. Not all tax advisors are created equal. Taxes are a very specialized area and there are specific strategies for specific business industries. For example, there are special tax saving opportunities for people in the real estate business. There are also special tax strategies for those in the manufacturing industry. The strategies that work for those in the services industry may not benefit those who are in the retail industry. Make sure your tax advisor is well versed in the tax saving opportunities in your industry so that you can take advantage of your proactive tax planning efforts.
Bad Sign: You don’t have a plan on how to tax efficiently take money out of your business. There are tons of different ways to take profits out of your business and each of them has their pros and cons. For example, if you are a C Corporation, you may save thousands of dollars in taxes by paying yourself a higher salary every year. If you are an S Corporation, the opposite may be true where you can save thousands to tens of thousands of dollars by paying yourself the least amount of salary possible. There are also some great ways for you to extract profits out of your business completely “Tax Free”. If you don’t have a plan in place to know “how” to extract your company profits tax efficiently, you may be over-paying your taxes.
Bad Sign: You are not currently taking advantage of tax deferred and/or tax free opportunities of retirement planning through your business. Ask yourself: Are you using retirement planning to significantly reduce your taxes currently? There are so many different types of retirement accounts that are available for business owners to save taxes today and save for retirement at the same time. If you pay taxes to the IRS and have not used retirement planning techniques in the past, you are probably overpaying your taxes.
Bad Sign: You have never heard of the term “fringe benefits”. There are tons of tax free fringe benefits available where your company takes a tax deduction for perks they provide to you as the business owner (and it’s not taxable to you). There are over a dozen of these wonderful techniques including company cars, gifts, and Medical Savings Account to name a few. If you do not utilize tax free fringe benefits as part of your business planning, you may be overpaying your taxes!
Personal and Business Deductions
Bad Sign: Not knowing what items you can legally shift from your personal bucket into legitimate business deductions. In this day and age, it has become harder and harder for us to distinguish between personal vs. business items. How many of us use our personal cellphone for business? How about our cars? iPads? Laptops? All these personal items that you use day in and day out for your business may be legitimate tax deductions. If you don’t know how to shift personal items into business deductions, you may be overpaying your taxes! Participating in proactive tax planning with your tax advisor can help point out some of these opportunities.
Tax Savings Plan
Bad Sign: Not having a tax savings plan in place to ensure you and your business profits are protected from Uncle Sam. Incorporating all of the items we discussed above, the question you should be asking yourself is “What is my tax savings plan?” If you don’t know it, if you can’t verbalize it, then you probably don’t have one. Not having an overall plan on “how” you will save taxes for your business and you personally is the most common mistake costing taxpayers to overpay taxes year after year.
If you have answered No to one or more of the above, then you may be part of the thousands of business owners in the US who are overpaying in your taxes. In case you didn’t know, the only way to legally save taxes is with proactive tax planning. As we all know, it is not as important how much money we “make” rather how much of it we get to “keep”!
Amanda Han, CPA