If you're staying on top of taxes, you'll get your small business's tax return soon. And if your accountant is too busy for you (a huge red flag, by the way) or you filed your own taxes, you'll need to analyze your return on your own.
A normal business tax return can be 30 pages, 40 pages, 50, 60, 70, 80... and that's a ton of paper to look through! It can feel even longer when you don't know what to look for.
At CSI Accounting & Payroll, we assign each of our clients their dedicated accountant who proactively makes sure they 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
Your business entity is a great place to start. Do you know why you're structured that way? It's important to know the different business entities and the different benefits they offer.
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... Consulting with business counselors, attorneys, and accountants can prove helpful."
Considering a Change
Have you considered if a different structure could fit your company better? When was the last time your current accountant reviewed your options with you?
Most of the small businesses that CSI works with are S-Corporations. We analyze S-Corp tax returns 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-Corp 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
If you have accountant fees, do you how they're broken down? When you're trusting someone with your accounting, it's important that you know how much you're paying them. If you don't have an accounting background, these can be missed.
If you have officer loans, do you know why you have them and what to do about them? We talk about these in our article about red flags on financial statements.
Depreciation
Did you purchase any equipment this year, and if so, was Section 179 utilized? This allows you to deduct the full purchase price of qualifying equipment from your gross income. You can take the full amount of the asset upfront if it's tax advantageous for you - but it may not be!
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
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 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.
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.
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 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 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
It's very important to remember that tax season isn't the only time of year that you need to be thinking about taxes. Does your business implement year-round tax planning?
We discuss tax strategy meetings and other meetings in this article. Our goal at CSI 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.
