Tax Preparation is a Habit, Not a Season
It’s become popular to call the period from January 31st to April 15th the “tax season.” But for many businesses, financial and tax experts agree, it’s best to keep taxes in mind all year round.
“You need to be aware of taxes all of the time,” said Brad Benesh, senior vice president of business banking for Twin Cities-based North American Banking Company. “You have quarterly estimated taxes, sales taxes, payroll taxes – they’re year-round. As for annual tax filings, the sharpest people are preparing in advance.”
As a banker, Benesh views himself as part of the team that each client builds to help them succeed in business and in specific areas, such as taxes. Along with accountants, legal experts and consultants that vary by industry, bankers help businesses invest in and use their resources intelligently.
Why a banker is important for tax preparation
Bankers help businesses activate their tax strategies. “An accountant can sit down with a business and help them figure out how to improve their tax situation,” said Benesh. This might include purchasing equipment for a business, or real estate; all or part of the cost of these may be deducted from a company’s taxable income, effectively reducing the business’ tax liability.
For major purchases, a loan or line of credit from a bank may be needed. That’s where planning ahead is important: If you need financing to make that purchase or investment, you want to give yourself plenty of time to get the loan in place before the tax deadline.
Another time to call your banker is when an unexpected tax bill hits. A successful year might mean a big tax bill, but a company might not have the cash on hand to pay taxes if they had to increase payroll or buy real estate or equipment because of their success. This can be a problem if it causes the business to fall behind on taxes.
By coordinating with an accounting expert and a banker, a business can secure a loan from a bank to cover taxes until revenues can catch up, allowing them to emerge from these crunch times stronger than before.
Be prepared for federal tax changes and aggressive Minnesota audits
Shawn Hermanson, CPA, Managing Partner of certified public accounting firm Hermanson & Leitner, understands the importance of having a strong team who looks at taxes all year round.
“A good accountant will be reaching out to do estimates in advance,” said Hermanson. “If we don’t like the answer, we’ll see if there’s ways to juice it with investments in equipment, or bonuses, contributing to retirement accounts or other maneuvers. But we need time.”
“Communication is key, and I can’t stress the team mentality enough,” Hermanson says. “The goal is no surprises on April 15th.”
This year, that goal will require more work to achieve. With sweeping changes to the federal tax code now in place for both businesses and personal taxes, accountants have been spending countless hours learning the ins and outs of the code and how it affects individual clients.
The decision that he is most concerned about for businesses is the so-called Wayfair decision, requiring businesses to potentially collect local sales tax on transactions conducted in other states starting in 2019 – so companies may now need to collect taxes in the jurisdiction where the customer makes the purchase. For online businesses, this can mean calculating taxes in thousands of different ways. And some of those local taxes are very complex.
“In some places, if you sell a candy bar with flour in it, it’s not taxed, but if it doesn’t have flour it is taxed,” Hermanson said. “A tow truck that tows a car with two wheels on the road might charge taxes differently than if it’s up on a flatbed.” In terms of interstate taxes, the impact is not only on online businesses, but companies that might cross state lines to do business – trucking or construction services, for example.
In Minnesota, Hermanson said, businesses need to be especially diligent, because the local taxing authority is very active. “Four or five years ago, Minnesota hired scores of sales tax auditors,” he noted. “The audit activity is like I’ve never seen before. You have to be really careful, because you don’t know what you don’t know. Once or twice a week I hear from a client that they’re being audited.”
Which comes back to the value of the team and hiring specialists appropriate to your business. “Sales tax law is its own universe,” he said. “People think these services, like accountants, lawyers or bankers, are expensive, but they save you money by doing it right.”
Steps to Consider to Address Major Federal Tax Code Changes:
- Consider your business entity: Some changes to the tax code that became effective in 2018 are significantly affected by your business’ tax entity, such as C-corporation, S-corporation or Limited Liability Company. Talk to an accounting professional.
- Prepare for changed taxes on interstate income: As of 2019, businesses may need to pay local taxes wherever business is done – so online retailers potentially must collect local taxes for wherever their buyers live, and businesses must pay local taxes on income earned for out-of-state projects.
- Reevaluate how owner pay is calculated: Owners should double check their pay structure with an accountant. Under the new tax law, more income might be taxed at the historically low 21% business rate, rather than at higher personal tax rates.
- For small business owners, factor in personal taxes as well: Since the business is also a source of personal revenue, small business owners should look at personal taxes at the same time. Code changes mean charitable deductions might not reduce your taxes, and certain deductions taken in years past may no longer apply.