Now that the final quarter of the fiscal year is here, it’s time for business owners to start planning for end-of-year tax calculations. Take time to recap your profits for the year so that your CPA can help you estimate your tax liability for 2013. The only surprises you want at the end of the year are gifts from family and friends, not a tax bill for an amount that you are not prepared to pay.
Block out a couple of hours to make sure that you can determine a pretty close estimate of your company’s taxable income. Start by collecting all of your financial records and statements for the year, including the statements for both income and expenses, and their balance sheets. Since IRS Form 1120 is the main way to determine your corporate income tax, download a copy of the form as well as the instructions for it from www.irs.gov.
Your company’s total income is not always going to be the same amount as its total profits. Be sure to include income sources such as capital gains, net gains, gross interest and royalties, and dividends.
Three things to subtract from the total gross income from all sources are returns, allowances, and the cost of goods that were sold this year.
The next step is to figure out all of the tax deductions that are available to your company. Once you subtract your total deductions from your total income, you will have your preliminary taxable income. Deductions include taxes, paid interest, repairs, advertising expenses, lease expenses, pension funds, payroll and benefits, and debt write-offs. Ask your CPA about certain other expenses that can be deducted from your total income. Some deductions can be taken based on net operating losses. The end result is your company’s taxable income.
Find out the minimum corporate tax amount this year from IRS Form 1120, then use the Tax Rate Schedule provided to determine whether your tax owed exceeds the minimum or not. Don’t confuse that with the alternative minimum tax that is available to certain businesses.
Information for the alternative minimum tax is in IRS Form 4626. There are three situations that will cause you to be exempt: 1.) Your corporation was established in this year; 2.) Every year since 1997 your company has been exempt; 3.) Your company’s gross receipts did not reach the amount specified in Form 4626 for this year.
A common mistake that small business owners make is using payroll taxes withheld from employees to cover business operations or expenses. If the payroll taxes are not turned over the IRS at the scheduled times, the owner’s personal assets can be tapped to pay them and penalties can be assessed.
One idea to reduce your tax burden is to donate unsold or unused inventory to get a deduction. Donations of goods valued greater than $500 have more rigorous reporting rules than smaller values, so multiple smaller donations might be easier.
Also, you could hire your spouse and children. The income of a minor child that is less than $6,000 in a year is not taxed the same way as ordinary income. The health care costs you’d pay for your employee-spouse’s family (which is, of course, your family) are tax deductible, and could also save money for both your business and your family if you’re not paying for any other health coverage.
Calculating your corporate tax liability can be daunting, but your accountant’s job is to make the entire process easier for you. Quarterly meetings with your CPA will help you keep track of your business’s ever-changing needs and make taxes and everything else more manageable.