Mid-Year Tax Planning for Small Businesses

For a small business, dealing with income tax matters is an unfortunate necessity, and you can’t easily dispense with the burden. Even though you recently finished your last year’s tax return, now is the perfect opportunity to make improvements for the current year. Waiting until the next filing deadline is too late.

Acting at midyear allows you to plan effectively for reducing your tax bill. You also can start implementing strategies that will save time in the future.

Start by examining your business income. The objective is to estimate your earnings for this year. Make sure that you account for all expenses, including depreciation. Your accountant can estimate tax depreciation for the year.

Compare your projected full-year income to the tax amounts you are scheduled to make this year. If you are paying too much in estimated tax payments, you can conserve cash by reducing future installments.

When you have more income than originally expected for this year, you are incurring additional tax liability. Your accountant can determine whether your estimated tax payments are sufficient to avoid an underpayment penalty. Even if you will not owe a penalty, you need to plan for paying extra tax next April.

Assess whether your business will require new equipment. By examining your overall financial picture now, you can decide to add or replace assets this year or wait until 2013.

Reducing your tax bill

You can reduce your tax bill by expensing the cost of equipment under Section 179, making it advantageous to purchase the equipment now. The large cash outlay is partially offset by saving money that would have gone to the IRS. Your accountant can determine your estimated tax savings based upon your expected marginal tax rate.

An evaluation of your business balance sheet reveals whether borrowing to make new purchases is reasonable. Banks are still lending to small businesses for expansion as long as they’re not already too highly leveraged.

Midyear is also a good opportunity to analyze the workforce. While workers are off on summer vacations, an astute business owner will take the opportunity to evaluate the impact of their jobs on the organization.

Some employees need additional duties, while others are overwhelmed with work. You can gain considerable insight by temporarily assigning their responsibilities to others while they’re away.

You also may find you have to plan for extraordinary cash outlays, for example, a computer upgrade to increase an employee’s output or new software to enhance overall productivity. You may want to spend more on employee training come fall.

Organize your records now. Your accountant can explain what is required to substantiate certain types of business expenses such as detailed mileage logs, which are necessary to deduct auto expenses, and adherence to specific rules for business meals and entertainment expenses. By accurately collating data now, you don’t miss valuable tax deductions or face disallowed deductions for lack of proper records.

As much as you would prefer to leave 2012 tax planning for another time, putting your mind to it now will save you time and money in the future.

What to Watch for When Reviewing Bank Statements

As a business owner, you know that finding the right tool for the job is critical. One of the most important items in your toolkit is the ability to reconcile bank statements to your business records.

Even if your bookkeeper handles the reconciliation process, you need to personally examine your bank statements for potential mistakes and fraud. This also allows you to notice and assign for disposition any returned checks from customers’ banks. Here’s what to watch for:

  • Bank charges. Ask your bank to explain those you don’t understand. Negotiate to reverse fees for services you don’t want or seldom use.
  • Scan for small transactions, usually less than $0.25 each. They are signs that a hacker is “phishing” for an active account number.
  • Review all debit card entries to ensure that you recognize vendor names, and check for duplicate transactions.
  • Inspect the check sequence. A number should identify each check. Fraudulent items may appear without check numbers.

Ask your bookkeeper about deposits not yet posted at the bank. Outstanding deposits should arise only near month-end.Identifying bank statement errors and fraud in a timely manner is essential. It ensures early detection of problems and avoids fraud loss. As well, failure to detect and immediately report fraud to your bank could result in your losing your right to pass the liability back to the financial institution.