If you're staying on top of taxes this year, you should be getting your small business's tax return soon. Check that off of your to-do list, and give yourself a high-five! You earned a little break, especially after making it through tax season while keeping your business running as efficiently as ever.
However, if you have an accountant who's too busy for you or filed your taxes by yourself, you'll need to analyze your tax return on your own. A normal business tax return can be 30 pages, 40 pages, 50, 60, 70, 80... that's a ton of paper to look through!
Your tax return can feel even longer when you don't know what you should be looking for. And chances are, if you're not an accountant, this part can start to feel like rocket science. Plus, if your accountant doesn't have time to talk you through this critically important document, do you think they have the time to take full advantage of tax strategies and benefits for you?
At CSI Accounting & Payroll, we assign each of our clients their own dedicated accountant who proactively makes sure that small business owners understand:
- If you are listed as the best business entity type for your situation
- What key items on your tax return mean
- How your accountant will help you with future tax strategy
Business Entities
Analyzing Your Current Entity Type
Recognizing your business entity type is a great place to start. Do you know why your business is that structure? It's important to have an understanding of the different types of business entities, as well as the different benefits they offer. The SBA discusses these options more in detail.
The SBA states, "Your business structure affects how much you pay in taxes, your ability to raise money, the paperwork you need to file, and your personal liability. You'll need to choose a business structure before you register your business with the state... Consulting with business counselors, attorneys, and accountants can prove helpful."
Considering a Change
The entity type you start with doesn't have to remain the same for the life of your business unless there are restrictions based on your location. Have you considered if a different structure could fit your company better? This is something that should be discussed with your accountant. When was the last time your current accountant reviewed your options with you?
Most of the small businesses that CSI Accounting & Payroll work with are S Corporations. We analyze S Corporation tax returns (Form 1120S) with our clients by helping them see if there is a profit or a loss, if they are taking a personal salary, and if they are taking advantage of S Corporation tax benefits.
We will always take a fresh look at your business entity type right when you come on board. We analyze it again after about a year or if there is a large change in your business, such as:
- You have a new business line.
- You acquired a new business.
- You sold part of your business.
- You brought on a new investor.
Key Items On Your Tax Return
Fees and Loans
We can help you locate your current accountant's fees on your tax return, as well as any existing loans to corporate officers. Do you know if you have any?
If you do have loans to corporate officers, are you comfortable with your knowledge of why you have them and what to do about them? We talk about these more in detail in our article about red flags on financial statements.
If you have accountant fees, do you know where to find how they're broken down? When you're trusting someone with your accounting, it's important that you're able to clearly see how much you're paying them. If you don't have an accounting background, these can be missed.
Depreciation
Depreciation is taking an asset with a life of more than one year and spreading the cost of it over its lifetime.
Did you purchase any equipment this year, and if so, was Section 179 utilized? Section179.org explains that it isn't a complicated tax code. "Section 179 of the IRS tax code allows businesses to deduct the full purchase price of qualifying equipment and/or software purchased or financed during the tax year... from your gross income. [It encourages] businesses to buy equipment and invest in themselves."
You can take the full amount of the asset upfront if it's tax advantageous for you - but sometimes it may not be! Monthly accountants can offer a range of advice based on your financial statements. For example, we would advise you to utilize Section 179 if you have a lot of profit. You can also look into bonus depreciation, which lets you accelerate the expense you can take on the asset.
Officer Salary
This is something that you'll want to pay extra attention to if your net profit percentage is negative and you took a higher officer salary. When this occurs, you're spending more on taxes than you need to. For example, if you have a $100k salary and a $10k loss in your books, you only pay tax on the $90k, but you're paying the $100k salary's worth of excess Medicare and Social Security taxes.
Officer Distributions
These are also known as dividends. Officer distributions or dividends are when you have enough company profit coming through that you're able to pocket some for yourself, and you don't have to pay it back. When these occur, you should examine the situation further. Is your lifestyle in line with your profits, or is it exceeding the money that your business is bringing in for you? Ideally, you should be putting the money back into your business to grow it.
Gross Profit Margin
This is also known as gross profit percentage. It shows your financial health by determining how much money is made off of sales after you account for the cost of the goods that were sold. Unless something changes in your operation, the gross profit margin generally should not fluctuate. It's helpful because it shows your profit while excluding taxes, interest, and overhead from your office.
A very important metric to keep your eye on, this can be found by taking your revenue minus your cost of goods sold, and then dividing that number by your revenue.
Gross Profit Margin = (Revenue - Cost of Goods Sold) / Revenue
Net Profit Margin
Net profit margin is also known as net profit percentage. It shows how much profit is generated as a percentage of your revenue, considering the business expenses that occurred in earning the revenue. In simpler terms, it is a measure of net profit to revenue, expressed as a percentage. This also shows your financial health because tracking this number can help you forecast profits.
The net profit margin can be found by taking your revenue minus your costs, and then dividing that number by your revenue. In this instance, your cost includes your cost of goods sold, operating expenses and other expenses, interest, and taxes.
Net Profit Margin = (Revenue - Cost) / Revenue or (Revenue - Cost of Goods Sold - Expenses - Interest - Taxes) / Revenue
Your Accountant's Responsibilities
Filing Date
Do you know when your accountant actually filed your tax return? It's not unusual for accountants to file for extensions, but not a lot of small business owners know that they only push back the due date for your paperwork, not for any money that is owed. To avoid any surprises, tax strategy should be a top priority to discuss in your meetings with your accountant.
However, if your accountant didn't even file your taxes on time, they probably don't have the time to perform tax strategies at all. In this circumstance, even if the accountant charged you less, you are missing out on more.
Tax Advice
Speaking to the point above, it's very important to remember that tax season isn't the only time of year that you need to be thinking about taxes. Your business should treat every season like tax season by implementing year-round tax planning. We discuss tax strategy meetings and other meetings in this article.
Our goal at CSI Accounting & Payroll is to make sure that our clients know what their taxes are going to look like several months ahead of time. This helps small businesses avoid surprises that they likely would have run into with other accounting services.
Are You Unhappy With Your Tax Return?
Now that you know about some things to look out for on your tax return, does it look like a quality document, or are there some red flags? Your tax return is not entirely out of your control! Your accountant should be able to offer you advice to get closer to your tax goals.
If you're interested in having a dedicated tax professional who will help you reach your tax goals, you can schedule a free consultation with CSI Accounting & Payroll to see if we are a good fit for each other. We hope to hear from you!
If you're not ready to make that jump, that's okay! You can read more about if you're a good fit to work with CSI here.
