There are few things that are more complicated or stressful than paying taxes. This is especially true if you own a business. While business owners must pay income taxes like everyone else, they also face complex web of rules about deductions, credits, depreciation, and income recognition.
Failure to understand these rules and regulations could have serious consequences. You could fail to take advantage of deductions and credits to which you're entitled and pay significantly more in taxes than you should. Even worse, you could file your taxes incorrectly and face substantial fines and penalties.
The best way to make sure you're filing your taxes correctly is to be prepared. For some business owners, though, that's the difficult part. You're too busy running your business to know the ins-and-outs of every tax law and regulation. You could work with a tax planning expert, but it may be difficult to know what information you need for the planner to do his or her job effectively. You may not be organized enough to gather that information even if you wanted to.
The key to preparation is knowing what information is important and what isn't. The following tax planning questionnaire can help you prepare for questions that any tax planning professional will likely ask. By answering the questions on this tax planning questionnaire ahead of time, you can make the most of your time with a tax planner and help them help you as effectively as possible.
Business Owner Tax Planning Questionnaire
1) How do you keep track of income and expenses?
This is the first thing any tax planner will want to know. Do you use software like QuickBooks to keep track of all revenue and expenses? Do you do it manually?
The more organized your system is, the more quickly a tax planner will be able to review your tax situation and provide informed advice. Ideally, you want a system that will allow you to quickly sort information to see aggregate numbers and drill down to specific payments. You also want to be able to sort expenses by category, so you and your tax planner can identify possible deductions and credits.
An online system is ideal for doing this. There are numerous software packages available online and some are very inexpensive if you're not a large operation. Your tax planner can also recommend accounting software.
2) Do you have employees?
Are they W-2 or 1099 employees? Salaries and wages is usually the single largest expense for most businesses. If you have employees, you can deduct their wages on your taxes. Again, to do this, you'll need to have accurate records about how much you've paid them and when. You'll also need to distribute year-end tax documents to them so they can claim that information on their individual tax returns.
If the employees are W-2 employees that are on your payroll and that you pay either salary or hourly wages, you'll also need to withhold their FICA, Social Security, and Medicare taxes. Collectively, these are known as payroll taxes. If you haven't been withholding them or if you don't know if you're withheld enough, talk to your tax planner immediately. Failing to withhold and pay payroll taxes could lead to big penalties.
3) Do you provide benefits for your employees?
If so, you may be able to deduct the contributions you make to those benefits. The major benefits that are deductible are group health insurance, qualified retirement plans, and life insurance up to $50,000 in coverage per employee.
You also may be able to deduct the costs associated with the management of the benefits. These could include the administrative costs of managing the plan. For a retirement plan, you may have an administrator that manages all contributions and distributions as well as an investment advisor to manage the investment choices within the plan. Their fees may be deductible.
Before you meet with your tax planner, gather all relevant information on these benefits. Your tax planner can then consider this information in any advice that he or she offers.
4) Do you use your car for business?
If you're like most business owners, you're always on the go to meet with clients, partners, and even potential employees. All that driving around costs you in terms of fuel, maintenance, and wear-and-tear on your vehicle. You can deduct all of that mileage on your tax return. Effective January 1, 2014, the IRS allows you to deduct $0.56 per mile drive for business purposes.
If you don't already, you may want to download a mileage app on your phone. On many of them, you simply turn them on when you start and turn them off when you stop. The app then aggregates the data so you can easily organize it at tax time.
5) Do you have a home office?
If so, you can deduct the portion of your rent or mortgage that is paid for the office space in your home. In order to calculate this cost, you'll need to know how many hours you've worked in the home and the square footage of the office space as a percentage of the entire home's square footage. Your tax planner can then use that information to calculate your full deduction.
6) Did you buy any property, equipment, or other business assets?
You can write off the purchase of certain assets up to a specific dollar amount. The amount depends on the type of asset. If the purchase price exceeds the limit, you can deduct the cost of the asset over several years as depreciation. The IRS has specific depreciation schedules for different types of assets.
When you meet with your tax planner, you should bring any documentation for all equipment and property purchases over the past several years. The tax planner can evaluate whether you can claim depreciation costs on those items and can advise on how that depreciation will affect your tax situation.
7) Do you have any business loans?
If so, you can deduct the interest on the loan on your taxes. This is also true of lines of credit. Bring in all statements on these loans for your tax planner to review and incorporate into your tax planning.
You may also want to ask your tax planner if he or she has a tax planning questionnaire that you should use. Many tax planners have clients fill out a tax planning questionnaire early in the planning process. That helps the planner fully gauge what work needs to be done and what information is missing.
Tax planning may not be fun, but that doesn't mean it has to be painful. You can make it easier by organizing your information as early as possible. Use this tax planning questionnaire as a guide or ask your tax professional to provide you with their own.
