Businesses tend to think of April 16 in the same way school kids think about the first day of summer — no more tax forms, no more accountants!
But businesses that take a summer vacation approach to tax preparation will have a rude awakening when the sun rises on another tax season.
Teachers say students experience the “summer slide” in their academic skills if they avoid reading and math during the long break. When businesses ditch their tax ledgers for months at a time after Tax Day, they experience a similar struggle.
Slacking Off Could Mean Paying Up
Seasoned business leaders understand that planning and preparing for tax season isn’t just some homework assignment that can be put off until the night before. Just as the go-getter students who complete summer reading programs remain sharp come autumn, companies that prioritize taxes all 12 months of the year remain better off.
Success starts with taking a proactive approach. If a business gets a head start on tax planning, it can set a more accurate budget, improve decision-making, and avoid pricey penalties.
Companies unable to collect all the information needed to file by April 15 can incur failure to file penalties equal to 5 percent of the balance owed for each unpaid month and a maximum fine of 25 percent. Though the penalty can be waived, you have the burden of proof with the IRS. And even if you file on time, not paying the full amount can result in a failure to pay penalty that’s 0.5 percent of your balance per unpaid month plus whatever underpayment fee the IRS wants to levy.
Keeping a tab on the company’s tax responsibilities clarifies the picture leaders have of their company’s bottom line and keeps potentially crippling fees and penalties at bay.
Sidestep the Summer Slide
Every business can take a few specific steps to keep its tax IQ sharp throughout the year and avoid an off-season tax lull:
1. Get a tutor.
Tax advisors don’t hibernate during their traditional downtime — they’re alert and eager to offer expert opinions. Your business will benefit from proactively engaging a tax consultant before making a major move.
Taxes influence everything, whether you’re thinking of international expansion, closing in on substantial asset purchases, or just hiring a new employee. Consult a professional on the best way to approach these changes in order to keep your business from stumbling into a significant tax liability down the road.
2. Stay a few steps ahead.
Surprises make for festive birthday parties, but they can ruin a small business owner’s day, month, and even year. Avoiding major surprises at tax time comes down to constantly keeping an eye on the IRS.
Keep forward-looking financial projections to maintain an accurate view of your potential tax burden. Focus on keeping your account books clear and organized year-round so your stress and unpleasant surprises are kept to a minimum at tax time.
3. Reward your best students.
For businesses with C-corp structures, issuing reasonable bonuses to leadership and employees makes sense. Not only do they improve employee morale, but they can also minimize corporate taxes.
When used thoughtfully, performance-based bonuses can incentivize your employees to go above and beyond their normal duties. The advantages of these extra payouts are twofold: They let your company both reward its best employees and actively manage the company’s tax obligations.
4. Keep regular progress reports.
There’s a reason accountants and tax advisors get labeled “bean counters.” Tracking your business’ growth in micro terms paints a clearer picture of how it can scale at a faster rate. In other words, if you aren’t tracking that growth, you’re impeding it.
A great trick for killing this bad habit is to accelerate the payment of some expenses instead of waiting until the end of the year. By making these payments early, you will see in real terms where the profits are soaring and where they’re lagging.
A student who fights the summer slide is better prepared for the next school year; businesses that are just as diligent about taxes are better positioned to bypass their peers. By taking a year-round approach to tax preparation, your company can minimize future tax payments, plan for expected payments, and avoid compliance catastrophes.
Don’t take an “out of sight, out of mind” approach to tax preparation. It’ll make the tax season wake-up call a lot less jarring.