A (relatively) simple tax review for year-end
Pre-script: these are topics I discuss with year-round tax retainer clients during their year-end tax checkup. If you’re a tax retainer client reading this, expect an email to schedule your call in a few weeks. If you’re not a client and would like to have these sorts of conversations, hit reply and let me know.
You frequently hear about advanced tax planning strategies on podcasts and social media, but there’s really a whole spectrum of tax planning. On the simple end are the best practices you can double-check yourself (like what this email is about). In the mid-range are some slightly more complex, but fairly common strategies that you’ll probably want some help with (like S-corps and tax loss harvesting). Then, at the very high end are complex strategies with oddly specific fact patterns that get hyped up on podcasts but will probably never apply to you (like the Augusta loophole and paying your children).
The simple end isn’t sexy, but it’s extremely accessible and can still save big bucks in small businesses (for example, even a simple bookkeeping review can save thousands). And, a few hours making sure everything is on track will save you more than the Augusta loophole ever will and will go a long way towards minimizing tax anxiety. Set aside an afternoon to do a basic tax review before the end of the year. Doing it now will give you enough time to make any necessary changes before the year closes and plenty of time to save for a surprise tax bill.
Review your bookkeeping:
Your business tax return is based on your bookkeeping. Your accountant will take your books and essentially reformat them for the IRS while injecting a lot of tax nuance that isn’t required by normal accounting. But, the starting point is your books and mistakes in your books may carry over. Some mistakes don’t matter (like calling something an office expense when it’s really a software expense 😱), but other mistakes (like missing expenses or overstated income) do matter and make a big difference in your final tax bill.
Log into your accounting software, generate a Profit & Loss for this year, drill down into each line, and review it. The three biggest things you want to look for are: bank transfers (either in your revenue or expenses), loan proceeds in your revenue (including those from a credit line), and missing expenses. Bank transfers and loan proceeds are relatively easy to spot and a good accountant shoulddd catch them, but some accountants don’t review your report details and just take your reports at face value (besides, even if you have a great accountant, you’re a sophisticated business owner, so you’ll review it anyway).
Finding missing expenses will be a little harder. You’ll need to rack your brain for what might be missing from your transactions. But, while it’s tough for you, it’s incrediblyyy difficult for accountants to catch missing expenses because they weren’t there in your day-to-day operations. They may catch obvious things (like no rent expense but your Zoom background is obviously a WeWork), but your accountant has no idea you put a purchase on your personal card. If you don’t catch it, it’ll disappear and so will the deduction you’re already entitled to.
(Here’s a fewer older issues that took a deeper dive into reviewing financials: Trust but verify (aka how to spot check a Profit & Loss report) and Review your Profit & Loss before you forward it to your accountant this tax season.)
Review your estimates and tax payments:
Taxes can only be minimized so much. At the end of the day, you’re going to owe taxes one way or the other. And, underpaid estimates are the biggest cause of ‘oh shit, I owe how much?!’ and the cash flow crunch that goes along with it. Checking your payments in November/December gives you months to save and prepare for any big balances.
Make sure you actually paid all your estimates. You should’ve paid 3 installments by now. You can check your IRS estimated payments history here: https://www.irs.gov/payments Checking your state payment history will depend on how robust your state’s tax portal is. Start by Googling ‘[your state] tax payment history’.
Then, check any paychecks you (or your spouse) receive. They could be from your S-corp, day jobs, small side gigs, or client contracts where you were paid thru a W2. Make sure taxes are actually being withheld, the federal tax withholding is over 15%, and the state tax withholding is roughly 5%. As your income goes up, that percentage will go up, but 15% is a safe minimum. (And, you’d be shocked by how many tax crunches are caused by under-withholding on paychecks. I’ve had to stop multiple people from refinancing or selling their homes.)
Reviewing your estimates and payments like this won’t be perfect because estimates are usually based on last year’s numbers and your tax rate may be more than 15%. If you want to take it a step further, roughly project your taxes with your accountant to make sure your payments are really on track. (And, when I say roughly, I mean roughly. There are a lotttt of variables. You’re just trying to get close enough.)
List your off-P&L deductions :
Taxes are complicated, to say the least. And, there’s a handful of deductions that technically aren’t business expenses and won’t appear on your Profit & Loss, but can only be deducted if you have a business. Most notably, those are the: self-employed health insurance deduction, home office deduction, and certain retirement contributions*. Good accountants will ask about them (or silently check if you’re even eligible), but tax season is busy and things may slip thru the cracks. Prepare this info and give it to your accountant along with your financials.
You’ll want to let your accountant know:
- how much you paid for health insurance and if you (or your spouse) were eligible for an employer-subsidized plan
- the size of your home office, the size of your overall residence, and the various costs of upkeeping your home (eg, rent, mortgage interest, property tax, insurance, utilities, etc)
- how much you contributed and what account type you contributed to (eg, traditional IRA, Roth IRA, SEP IRA, solo 401k, etc)
(* note: how you report retirement contributions varies wildly depending on the account type and business structure. Just make sure your accountant knows you contributed to an account. They’ll handle the nuance.)
Talk to your accountant :
‘My accountant doesn’t do tax planning with me’ is one of the top three things I hear during intro calls. But, accountants are terrible salespeople. Yours may offer a year-end review, but never have mentioned it (or mentioned it once when you were tiny and never brought it up again). If you want help with this sort of year-end review (and you like your current accountant), ask them about it. Shoot them an email and ask: ‘Hey [accountant who I don’t love as much as Michael], could we get together to review my tax payments and bookkeeping so there aren’t any surprises next year? How much would that cost?’
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