No one wants to pay taxes. I guess I should clarify – everyone wants to make money but doesn’t want to pay more taxes than they have to. This is true in good financial times and bad. Being tax efficient in today’s business climate is just as important as the other financial checkups you run on your company like reviewing the profitability of product lines or scrutinizing renewal of expenses.
An often overlooked aspect of being tax efficient is also being tax responsive. Too many businesses let their taxes get behind and rather than stepping up to the plate, bury their heads in the sand saying “I’ll deal with THAT later.” This is bad for a number of reasons and will not give you good graces in the watchful eye of the IRS. As we approach the 2015 extension season, here are some things to keep in mind if you’re procrastinating on getting those returns done.
1. You can accrue penalties even if you don’t owe taxes. Didn’t file your taxes on time this year? No problem – if you filed an extension and it’s still within that extended time frame. But once you pass that extended date, you will get hit with a per shareholder penalty per month for every month you are late – regardless of whether you showed income.
Currently, this penalty is $195 per month, per shareholder that you file your return late. For example, if your corporation has four shareholders and you were super busy in the fourth quarter and didn’t file your extended S corporation tax return until the following February there will be a penalty of over $3,000 plus penalties and interest on top of it.
LLC’s and Partnerships come with the same stiff penalties. Although these returns are a little more lenient since the max penalty is for twelve months. Also, if you have an experienced CPA and less than twenty managing members, you can usually qualify for an automatic abatement of those penalties. But don’t use that as an excuse to be late!
2. Once you have been late, forget ever being forgiven. The IRS has a very good memory when it comes to repeat offenders. Meaning, if your return is late one year and then again the following year, they will very rarely abate any penalties that you accrue after that first time relief. This is a great excuse to stay on your best behavior. File and pay on time. You never know when you will need a favor (in the form of a penalty abatement) from your friendly neighborhood IRS office.
3. All taxes are not created equal. A business owner faces the onslaught of many different forms of taxes – corporate income taxes, personal income taxes, payroll taxes, state taxes - and each comes with a different regulating body looking over your shoulder.
But not all taxes are the same and therefore not all taxes are collected in the same manner. Usually, if you have a payment due with the IRS for federal income taxes, you can work out a payment plan at a very reasonable interest rate. However, get behind in payroll taxes and you will face severe penalties. Extreme cases of past due payroll taxes can even be assessed against you personally – regardless of what type of legal entity you have set up. Payroll taxes are considered trust funds that belong to your employees and not you. So, make sure you pay those payroll taxes on time!
Also, certain states have the habit of placing a lien on your account for what they think you will owe if you do not file. I’ve seen Calfornia wipe out a checking account with a lien on their estimate of corporate income taxes and I’ve seen Florida take the balance in a checking account based on their estimate of sales taxes. So, in following through on item one above, make sure you plan for paying the taxes but also make sure you stay on top of filing all of those state taxes as well.
Like anything in business, great tax planning just takes some proactive foresight. By working with a seasoned and conscientious tax preparer you can mitigate the effect that taxes have on your cashflow and plan to file on time and with the least amount of taxes and penalties possible. More importantly though, be versed in the various types of taxes that your business must file and pay to avoid unpleasant surprises that can take you off task in your company’s success.