It’s that time of year. There are those water coolers, co-workers or clients who leave you room to breathe. Cliché as it may sound, this is actually a good time to consider how the tax filing deadline may affect your small business.
There is a small window for small businesses to submit forms to the IRS by July 15. Those extra few days can be critical if you’re a small business owner. Many “grass-roots” businesses, such as mom-and-pop shops, don’t have the resources or infrastructure to prepare for the process, and instead don’t use a CPA to help file taxes.
However, if you receive a Notice of Estimated Tax, an IRS reminder notice or other correspondence from the agency stating that your 2016 taxes are owed or your unpaid taxes are owed, you should still file for the year. The issue isn’t with the agency being overly serious. It is often due to the fact that the U.S. government faces a $333.7 billion budget deficit — meaning the IRS must make a proposal to find some revenue to offset the red ink. That means you could be headed for another delay on filing your taxes.
Instead of taking another push from the IRS to file, contact a trusted, local CPA or even your CPA’s firm. You can talk to them about changes or new information for your 2016 taxes. You may also receive a tax extension until Oct. 15, provided you have submitted a form W-8 to your accountant by Aug. 31. Depending on the size of your business, it may be worth your while to file and keep records of your prior taxes, even if you wait until the last minute. Make sure you also have your insurance renewal information on hand for that particular year as well.
Small business owners face three possible outcomes when they forget to file taxes:
Make additional payments over the next year. As discussed in the Washington Post article, this will be expensive, especially if you filed an extension. If you make additional payments this year and you miss the deadline for the next year, you’ll have to pay the IRS the amount that is the difference between what you paid this year and what you owe next year. If you fail to file your tax return, you’ll be hit with a tax penalty of 5 percent per month.
Create a trust that’s run by a trustee or another family member. If you have a trust that is open to outside investors, it can allow you to collect capital gains tax now and apply the payments to your income tax, thereby using your money to help reduce future tax bills. For example, if you owned a small business and had to sell your shares, you could pass all proceeds to your children and avoid paying taxes on the gains until they were gone.
Structure your business as a corporation or S corporation to avoid paying taxes on the income. Depending on your purpose, having a corporation means that you can pass on money to family members. As mentioned, a form W-8 or other related documents are required to show who receives those forms from you. You might also want to save that W-8 or other similar documents for the IRS if you’re going to pass on a business to the next generation.
It’s not enough to prepare for the IRS deadline if you forget to file the correct tax forms, so be sure to do your homework ahead of time and stay as organized as possible. Getting the IRS to believe you will be aggressive and accurate in handling any problems could reduce your tax obligation. However, if you’re well-prepared and file on time, nothing will happen to you — and that is all you can ask for.
Charli Worrall is an associate CPA at Greenberg Glusker. This article was originally published on their website.