Tax Planning Tips for Small Businesses

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Business owners are generally required to pay a variety of taxes associated with their business. If the business owner owns real estate associated with the business then property taxes must be paid to the city or county where the property is located. Businesses which engage in transportation, communications or fuel consumption will also be required to pay excise taxes. Some states implement gross receipts tax rather than a state income tax meaning the revenues on your business will be taxes. Most states also require that merchants collect sales tax and pay to their state department of revenue.

Of course all businesses will pay income tax, or the tax on their business revenues minus any deductible expenses. If you are a sole proprietor or partner of a business then you will be required to pay self-employment taxes based on your business income for social security and Medicare purposes. If your business is large enough to have employees, then you will be required to collect payroll taxes from your employee’s paychecks, match some of those funds from your business revenue and send in to the IRS. Unfortunately, the IRS code can be incredibly complex and it can be both frustrating and time-consuming for small business owners to ensure all taxes are paid on time and in the correct amount. If you designate a regular time each month in which you work on business taxes—and nothing else—will keep your business current and ensure you don’t miss any deadlines.

Making Tax Season Easier

To make the tax season less painful, keep your financial records in good shape throughout the year rather than making a frantic, last-minute effort to find everything you need and put it together. Keeping a ledger book of expenses and receipts; keeping everything organized will make it much more likely you will be able to deduct certain business expenses and save some money at tax time. Although it can be time-consuming, try to stay up-to-date on what deductions you are allowed and what you will need to have on hand to prove those deductions. Keep original receipts for entertainment, travel, meals, home office expenses and health insurance if you are self-insured. Although it may sound like an unnecessary expense, hiring a professional CPA to do your business books can not only save you time and headaches during tax season, but can help you make better decisions all year long.

Using accounting software with payroll functions is the easiest way to ensure your payroll records are accurate and effective. Some software programs also alerts the user to changes in tax laws, calculates withholding amounts and provides financial reports to save time during tax season. Online tax filing can also streamline your tax season; online filing is easy, efficient and saves you considerable amounts of time over doing it the “old-fashioned” way. Most tax software programs also offer support should you have any questions or problems during filing.

Business Deductions That Will Save You Money

If you use your car for business purposes you are allowed to deduct a portion of the costs including mileage, toll fees, maintenance and repairs. Some advertising expenses are allowed as are subscriptions to magazines or journals which relate to your business or industry. Travel miles logged for business are deductible as well as specific computer software purchased for your business. If you pay employment taxes, your share is a deductible business expense and health and life insurance plans for your employees are deductible as well. The percentage of your home that is used for a home office is a deductible business expense and all educational expenses related to your business which are used to improve your skills are also deductible. Cell phone usage can now be deducted without the requirement of extra documentation and start-up businesses can deduct up to $10,000 in expenditures. Even if you take advantage of all these tips and are super-organized when tax season rolls around, it can still be extremely advantageous to consult with a tax attorney who can give you extra information regarding your business taxes.

 

Can I Be Sent to Jail for Failure to File Taxes?

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Obviously it’s a crime to cheat on your taxes or to willfully or even accidentally fail to file your taxes. That being said, in the past few years less than 2,000 have actually been convicted of a tax crime although over 4,000 are annually investigated. This number is roughly 0.0023% of all taxpayers which is a ridiculously small percentage of the population when you consider that the IRS believes at least 15% of all taxpayers are not complying with tax laws. A criminal investigation will generally begin with a special IRS agent conducting interviews with the taxpayer’s friends, family, professional advisers and anyone else with potentially incriminating information.

The IRS also believes that a full three-quarters of tax cheating is done by middle-income individuals with the remainder of the cheating being done by businesses. Businesses which deal largely in cash, self-employed handypersons and doctors are considered the worst overall tax cheaters in America. As far as under-reporting of income goes, the IRS considers car dealers, salespersons, doctors, lawyers, accountants and hairdressers to be the worst offenders.  Although such high profile tax cases as the Wesley Snipes case make headlines and strike fear in the heart of everyone who has ever fudged on their taxes, the statistical likelihood of being convicted of a tax crime is practically zero.

How People Cheat on Their Taxes

The vast majority of cheating is a result of deliberate underreporting of actual income. This is known as tax evasion which is the most commonly charged tax crime prosecuted by the IRS. The IRS has started giving a second look to deductions claimed by business owners—a crime which ranked second to tax evasion.  Claiming the first-time homebuyer tax credit comes in on the list of ways people cheat on their taxes as does working a job under the table while collecting unemployment benefits. Lying about income to qualify for government benefits and underreporting tips round out the list of the most common ways Americans cheat on their taxes. For those who make less than $200,000 per year the IRS audits approximately one in 99, however for those over that limit the number rises significantly.

What if You Get Caught for a Tax Crime?

If you are one of the unlucky taxpayers who gets tagged for an audit and the auditor catches you in a blatant tax lie you could be hit with a penalty, or the auditor has the option of referring your case to the Criminal Investigation Division of the IRS, although this is a relatively rare occurrence. Keep in mind that an IRS auditor will not tell you he is referring your case for criminal fraud prosecution but might stop your audit in midstream. Tax auditors are trained to spot any type of tax fraud including tax evasion.

The obvious examples of tax fraud would include using a false social security number, keeping two sets of books or claiming dependents who don’t exist—all of which could definitely get you in serious hot water with the IRS and potentially place you in that small category who are referred to the CID. If you have simply made inadvertent mistakes on your taxes, auditors are generally pretty understanding and fully aware of the complexity of the tax code. However, even if deliberate fraud is not an issue, you can still be slapped with significant fines. Phony deductions and exemptions can also be punished through high fines—in some cases you could pay a 75% civil penalty as opposed to an approximate 20% penalty for simply making an honest mistake.

Hiring Legal Counsel

Combatting tax fraud is never a do-it-yourself project meaning at the first sign of trouble you should immediately consult a tax attorney, or, if you have bigger IRS problems, a criminal defense attorney. Never try to lie your way out of fraud charges—in fact, keep your mouth closed until you have had the opportunity to consult with an attorney. While you probably won’t land in jail, take charges of tax evasion or tax fraud very seriously and contact an attorney who will take it just as seriously, offering professional help to get you back on track.