Tax season is arguably everyone’s least favorite time of the year. The only thing that could possibly make it worse is going in expecting a refund and instead, end up facing a huge tax bill. Not only is a situation like that inconvenient and frustrating but it could potentially throw your budgeting and business planning for the year completely off. That’s why it is so important to plan ahead for any tax liabilities you may have. A well-thought-out tax plan can help ease the burden and better prepare you to face the numbers. We have found that most business owners are proactive and try to calculate the amount themselves. However, oftentimes they are misinformed on what exactly they get taxed on. Is it simply what is left in the business’ bank account on December 31st; is it the sum of all the draws the business owner made throughout the year; or is it something entirely different? If you are using the wrong numbers for your calculations, it does not matter how detailed your tax planning is, you’ll be calculating the incorrect amount owed.
When it comes to the annual Federal Income Tax businesses are taxed on the Net Profit of the company. On one hand, finding your business’ net profit pretty simple: net profit is calculated by taking all the business’ income and subtracting all the business’ expenses (due to the nature of cash flow throughout the year, this very rarely ends up being the same amount as the business’ bank balance at year-end).
But wait, there’s more
But, in reality, calculating a business’ tax liability is a bit more in-depth than that, and the net profit of your business as determined by the IRS may not always match the net profit on the Profit and Loss statement your software generates. The IRS does not treat all expenses the same. Meals and Entertainment expenses, for example, are only 50% deductible. And certain large purchases are actually categorized as assets and not expenses. This means they cannot be 100% deducted the year they were purchased and need to be depreciated over a number of years (and how many years is that, well that number depends on what was purchased).
In addition, depending on the classification of your company (such as partnerships and S-Corps) the income of the company is not taxed at all and is “passed through” to the partners and shareholders to be taxed on their individual tax returns.
All of this sounding confusing? Don’t worry!
Calculating Destiny, LLC Can Help
At Calculating Destiny, LLC, our team of knowledgeable and experienced professionals is dedicated to helping you to minimize your liabilities and maximize your assets. It is our goal to work with you and your team to optimize your financial statements in order to help you succeed.
In light of COVID-19, we are not currently seeing any clients in person. We have implemented strict policies and procedures to keep you and our team safe. We now offer contactless pickup or dropoff at a secured and monitored hatch. In addition, our office is equipped with all the latest technology that allows us to virtually communicate and remotely work with a client on their books.
To learn more about how we can help to put your business back on track for financial success, schedule a free consultation by visiting us online or calling us at 215-674-3430 today!