The thought of having to pay more taxes is troubling for everyone, but an accurate tax return is as important to the business as an annual physical is to its owner. Just like a physical shows your internal health and shows early warning signs, a properly prepared business tax return will also show the true health of a business and can signal potential dangers. In college I did not major in business, which, as a business owner, forced me to learn the hard way – through trial and error.
It was through trial and error that I learned two important lessons about small business and taxes.
First the trial - when I decided that I should and could prepare our tax return.
One of the more painful aspects of owning a business is the many hours spent on bookkeeping for tax reporting. Affordable computers, POS (point of sale) systems and tax preparation software make it easier to collect and retrieve information and can even tempt an owner to do their own tax return. As a young entrepreneur I was driven to have total control of my business. I felt that in order for something to be done correctly, I had to do it myself; which led me to attempt our own tax return. Armed with the latest version of Turbo Tax for business and a tax code digest, I was ready to begin. Turbo Tax pops up questions, you fill in the numbers and you’re done; how simple is that? After six hours of punching numbers into the program and never getting a balanced balance sheet, it dawned on me that I could just keep changing the numbers until a program message congratulated me on completing the return– but it would not be an accurate representation of my business. There is so much to learn about a business through its tax return that owners should consider hiring a professional CPA, just as you would hire a doctor for your personal physical. Now I turn everything over to our CPA and while they are preparing our tax return, they are also analyzing the business from a fresh prospective, and when the return is done I enjoy learning more about our strengths and weaknesses.
Second the error - when I didn’t incorporate a tax strategy into our business plan.
The early stages of expanding our business were difficult; we were adding equipment, expanding merchandise, creating jobs and aggressively paying down debt. Even though there never seemed to be enough time or money, I thought I had everything covered. But I’ll never forget the shock and horror I felt the day I found out we owed over $20,000 in taxes. With our cash invested in the business and no money to pay the taxes we found ourselves in a very difficult position. Owing the taxes was a definite problem, but what was more troubling to me was how I managed to overlook this. Even though we were generating monthly profit and loss statements it was not until the final inventory, accounts receivable and payable were tallied that we saw the whole picture. I learned the hard way that a business can not reinvest all of it profits for growth and debt payment without consideration for taxes. Sounds elementary, but when you’re in the trenches of running your business it’s easy to overlook. Business owners should be educated in the fundamentals of a tax preparation, but the best strategy for getting an accurate return, reducing taxes and complying with taxes laws is through a professional tax preparer or CPA.
