Making Business Taxes Less Taxing in Five Simple StepsJonathan Ankney
A couple of months ago, one of my sisters e-mailed me from the dentist: one of my seven year-old nephews had three cavities, and it was not a pleasant visit. When we finally got a chance to catch up at Easter lunch, my nephew went through his new routine that will make future visits to the dentist less distasteful: brush thoroughly, floss, and use mouth rinse.
His dentist visit actually made me think a little about the painful experiences many business owners face when getting to tax day. Yes, taxes need to be reported and paid regularly, and the complicated code cannot be avoided, but with a little bit of time invested in these five steps, you can create a system to make taxes less painful—just like my nephew can make his next visit to the dentist easier.
Make a tax estimation spreadsheet
The first step is to create a system for calculating taxes. To do this, learn the fundamentals of how taxes for each jurisdiction (federal, state, city) and tax type (income, property, sales) are calculated. The IRS, as well as many states, tax on net income. My home state of New York asks for gross income, net income, net assets, calculates a tax on each, and finally taxes on the maximum of those three items. Some cities also have business taxes. New York City’s taxes follow the state’s closely, while cities in Connecticut require businesses to pay a tax on property, vehicles, and equipment.
Then, once you know where taxes are paid and how they are calculated, create a spreadsheet that calculates what the taxes would be. The IRS spreadsheet, for example, would allow the net income to be entered, plus any adjustments the IRS requires (such as limits on charitable contributions, or the addition of depreciation), and then the tax would calculate automatically.
Update your estimates quarterly
After the tax estimate spreadsheet is made, you can use that as a template to copy and update regularly. The first estimate should be made when the annual budget is created, and then additional estimates made after each quarter. As estimates yield to actual figures, the tax estimate will become clearer, which will lead to the next step, which is…
Make quarterly installment payments
…after making a quarterly update to the estimate, make an installment payment. Some tax preparers give instructions in January regarding how much each quarterly payment should be, and it is most important for each business owner to check to make sure that they are paying the minimum due, but this method is much more proactive and responsive to economic reality.
The way to calculate the bill is a simple two-step process:
- Figure out the balance remaining, which will be the annual estimated bill minus the total payments made to date, and then
- Divide the balance remaining by the number of quarters left in the year.
For example, if it’s the end of the second quarter, the updated annual tax bill is estimated at $25,000, and $10,000 in payments have been made so far, then the remaining $15,000 would be paid in two parts: one now for $7,500, and the remaining $7,500 in the next quarter.
Draft your tax returns as soon as possible
A well-oiled finance operation should have draft financial reports ready by January 15. Using those, a tax preparer should be able to give draft tax returns and provide the final installment payment amount for the year. With that information, a business would have several months to finalize taxes, consider any additional tax strategy, and be ahead of the game for the tax filing.
Finally, there are going to be times when there are unexpected changes and surprises, and usually it’s not “bank (or IRS) error in your favor!” For this, and every other challenge that comes along, there’s nothing like a healthy reserve in the business savings account will come in handy during those times.
Years ago I set up this system for myself, and it’s made taxes, well, less taxing! If you’ve been challenged with taxes in the past, take these five steps and see what a difference they make next year.