Taxes have to be paid. If you make money in the United States (technically even outside of the United States), you are required to pay taxes on that money. If you get a refund at the end of the year, guess what? You paid taxes too!
The only difference between people who pay a lump sum in January or April and those who get a refund is: one isn’t paying enough taxes throughout the year and the other is paying more than enough taxes throughout the year.
That’s it!
I hear time and time again from new clients how they are tired of paying high tax bills and they instantly feel that they either
A. Start a Business
B. Change the entity of their business
C. Change their Withholdings
I’m here to tell you that all of those could be possible answers. It all depends on your personal tax situation. But I can surely let you know that these are the top ten causes of a high tax bill as a small business owner
Small Business Owner:
- Business Profitability: High Profits = Higher taxes
- Pass-through Taxation: Pass-through entities should know that the income from these pass through to the owners’ personal return which then they are subject to individual income tax rates. Examples: Sole proprietorships, partnerships, and S corporations
- Self-Employment Taxes – some small businesses have self-employment tax that covers social security and Medicare taxes
- Lack of Tax Planning – When you don’t plan you plan to fail where if you plan you are being proactive. Businesses miss out on many deductions or credits that could lower their tax liability
- High Expenses – Even though you feel like you should deduct everything to help reduce taxable income, it might not offset the total amount of income
- State and Local taxes – Some states and local cities require businesses to pay taxes!
- Inaccurate Record-Keeping: Coming to your tax professional at tax time or even the month of the due date with receipts, statements, and all types of stuff is BEYOND wild to me!
Example: You cannot provide a lawyer with some of the pieces of your court case and expect them to be ready to defend you the next day and win right?! Exactly so stop expecting that with your money situation
8. Depreciation recapture – Purchasing a large piece of equipment and writing off the total balance in the year of purchase and then selling it before the lifetime of the equipment. This causes recapture of the depreciation which results in higher taxes
- Underpayment of Estimated Taxes – Failing to pay accurate estimates and quarterly taxes throughout the year can lead to penalties and higher tax bill.
- Tax Law Changes – Changes in tax laws and regulations change very frequently and can have impact on taxes including: changes in tax brackets, deductions, and credits for business and individuals
These are just a few of the changes that cause a higher tax bill. Being proactive and planning strategically can help eliminate most of these issues. I hope this information helps make changes to your tax bill next year!
**Disclaimer: The information provided in this post is for entertainment purposes only and is not meant to take the place of professional legal, accounting, or financial advice. If you have any legal questions about this post or the subjects discussed, or any other legal matter, you should consult with an attorney or tax professional in your jurisdiction (i.e. where you live) or send us a message.