Plan Now To Avoid Tax Surprises

November 2009

A good practice for all business owners is to sit down with their CPA every fall to do tax planning to identify expected liabilities and strategies to minimize the tax burden. This year it is more important than ever to stay on top of tax issues given the dynamic economic and tax environment. Plus, most small business tax issues need to be reviewed in an integrated fashion along with the personal tax situations of the principal owners.

Specific issues to address with your CPA, if you have not already done so, include:

Estimated taxes

1. Most business owners wish to avoid interest and penalties by paying their tax liability via quarterly estimated tax payments.
2. One tactic sometimes used to avoid penalties is to prepay current year taxes, via quarterly estimated taxes, by paying an amount equal to the prior year's actual tax liability. Many businesses are unfortunately posting significantly lower profits in 2009 than in 2008, so this method may result in excessive and unnecessary tax payments. Work with your CPA to match estimated tax payments with your actual current year estimated tax liability.

Integration with personal taxes

1. Most small businesses are structured as entities such as LLCs and s-corporations where the tax liabilities of the business pass through to the owners of the business. In this case, the tax decisions of the business directly impact the tax liabilities of owners. Business owners should be informed of the estimated taxable gain or loss that will flow to them personally. Any associated cash distributions should be planned to provide owners with the cash with which to pay their pass-through tax liabilities.
2. For closely held businesses with one owner or a small number of related owners, the tax issues of owners may impact decisions made for the business. With the volatile stock market and real estate market, owners may be sitting on large realized or unrealized capital gains or losses which can factor into the overall strategy.

Transaction timing

1. There may be a benefit from recognizing certain revenue and expense items in 2009 or from delaying the transactions into 2010. This may be especially true if there is going to be a significant change in your marginal tax rates in 2010.
   

Bookkeeping and reporting

1. Effective tax planning is dependent upon accurate and up-to-date financial reports showing year-to-date business profits and capital expenditures, and expected results through year-end. Your CPA will struggle to provide effective tax advice if you do not present him or her with good information.
2. Ask your CPA for feedback on the quality of reporting you provide and for suggestions on how bookkeeping can be improved to make the tax planning process easier and more effective.

SmartBooks can help:

Our clients receive accurate, timely financial reports which can be used for effective tax planning. We work directly with our clients' CPAs to provide whatever additional information would be helpful to the CPA. For c-corporation clients, we set up estimated tax payment schedules and income tax accruals on their monthly financial statements.

If your business is having trouble staying on top of its bookkeeping or getting regular financial reporting, please contact us. If you are looking for a good CPA to help with your tax planning, we have relationships with several very goods CPAs and can make an appropriate referral depending on your needs.