Of Football and Taxes

Ah, the fourth quarter. In football parlance, it’s that time when teams on the winning side of the game fortify their defenses and protect their leads. And teams on the losing side often make desperate, risky plays to score, including long, seemingly impossible passes called “Hail Marys.”

In the business world, the fourth quarter is when tax-paying entities furiously work to bolster their bottom lines. And any “Hail Mary” strategies had best be left on the sidelines.

Importance of planning

If you think April 14—or even Jan. 1—is the time for tax planning, then you should expect to pay up like a gambler on the losing end of a Super Bowl bet. Tax planning is a yearlong—years long, actually—process, beginning with consultations with your certified public accountant or tax adviser, and carrying on through the year with attention to expenses tallied and receipts gathered.

“Tax planning is paramount to any enterprise to avoid penalties, which are the scourge of all businesses,” says Jeffrey A. Schneider, a small business tax adviser with Schneider Financial Services (www.sfstaxacct.com) in Royal Palm Beach, Fla. “Millions of dollars are wasted by small businesses by not paying into the IRS the required amount in estimated taxes, or by waiting too long to plan their tax strategies. This is like throwing your money down the drain.” Or, heaving an errant Hail Mary.

Preparation strategies

These tips will help you prepare for tax time.

  • Plan before Father Time’s said his piece. Deductions, last-minute purchases and other forms of year-end planning must be completed before the clock strikes midnight on Dec. 31 of the tax year. You still can make contributions to your individual retirement account or other retirement plan up until April 15.
  • Don’t go it alone. Periodically meet with your adviser to map out strategies—especially as the year progresses. Tax payments should be calculated based on income, which can be a fluid thing in the freelance business. If you don’t have a planner, it might be wise to hire one. While year-round advice can help ensure you’re toeing the line, you might just need some help planning your year-end tax strategies. And while tax or accounting software can assist with some planning and preparation of your return, a real live human versed in small business/home business tax issues might help navigate some of the nuances of the U.S. tax code.
  • See eye to eye. Whether your planner is an accountant, a tax attorney or a financial planner, seek counsel with experts experienced in small business financial issues—and whose philosophies mirror your own. Not holding similar beliefs could leave you uncomfortable and questioning your planner’s strategy. For example, if you work from home and elect not to deduct your home-based work space because you believe it raises a red flag to the IRS, and your tax adviser is a proponent of taking the deduction, the two of you could find yourselves at odds each time that issue arises.
  • Ask and ye shall learn. Contact your local office of the Small Business Administration (www.sba.gov), the Service Corps of Retired Executives (www.score.org) or the local state university’s Small Business Development Center (www.asbdc-us.org). Even the Web site of the Internal Revenue Service (www.irs.gov) is a tremendous resource. While there, download a copy of Publication 587 (“Business Use of Your Home”), and learn what is required if attaching Form 8829 to your tax return to claim the deduction of the home.
  • Keep those receipts. Seriously. From a $1,500 computer purchase to a 25-cent toll, keep receipts for every bona fide business purchase or expense. Create a file into which you can throw the receipts along the way, and tally them by month or quarter.

    If you know that you’ve lost some receipts—for tolls, meals, cash expenses, etc.—reconstruct those expenses. Keep thorough notes in your calendar or digital assistant, detailing all travel. This will help spur your memoryregarding any expenses with-out receipts—and such substantiating documentation can help prove and justify your deductions.

  • Make it jibe. Between your receipts, mileage log and date book or contact management software, make sure all your days’ events correspond. Note every business trip—including impromptu trips to the local office superstore (events that weren’t scheduled in the calendar)—as a reminder of where you went when.

    Blind holdings

    You may work alone, but Uncle Sam is always by your side, hat in hand, come each quarter (or month, depending on your tax payment requirements). He must get his share on time or penalties and interest will be assessed. For that reason, I take a salary and pay my expenses. But before I go out and buy some great new laptop or ergonomic chair, I try to stash just enough money to cover my monthly tax bill. My trick is called “blind holdings.” I subtract from my running checkbook balance one-fourth of any client checks I deposit. This way, I know the money is there when tax day comes around each month.

    Besides, the IRS will frown if you wait until April 15 to pay your tax bill—even as a freelancer. Estimated tax payments and wage withholdings are expected throughout the year. Don’t delay, because you’ll pay more in penalties and interest. Schneider warns, “If you wait until tax return time to pay your tax, the IRS can assess substantial penalties.”

    With a little planning, including a huddle with your trusted adviser, you can roll through the tax season like a team built to become a dynasty—and not one constantly scrambling to make up lost ground. Along the way, you’ll be better prepared to focus on delivering quality product and creating new business, than wondering how you’re going to keep more of what you earned.

    And that, football fans and freelancers, is how the game of tax planning is played.

    This article appears in the December 2002 issue of Writer’s Digest.

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