According to the IRS, taxpayers have the right to only pay the amount of tax legally due, including penalties and interests. However, so many businesses end up overpaying their taxes because of simple mistakes or misunderstandings of the tax laws.
That’s sad, but it’s not a surprise.
After all, the federal tax code is over 70,000 pages long and growing. And it seems to get more complicated every year. Understanding such an enormous and ever-changing system is daunting for even the most tax-savvy business owner.
But you still need to know how to claim all the deductions and credits you’re entitled to. Otherwise, you’ll be leaving so much money on the table. That’s why it pays to have a good tax professional in your corner.
Here are some of the most common reasons why businesses end up overpaying in taxes.
4 Main Reasons Businesses Overpay
1. Lack of Knowledge
Tax avoidance is legal. Tax evasion is not. Unfortunately, many business owners don’t know the difference. They either don’t understand the tax laws or are too afraid to ask for help. As a result, they either don’t claim legitimate deductions or credits they’re entitled to, or they claim too many and end up getting audited.
The tax code is constantly getting updated with positive tax-saving opportunities such as credits, tax breaks, and policies meant to help small businesses. But unless you’re keeping up with the changes, you could be missing out. Unfortunately, keeping up with these changes is a full-time job, and most business owners just don’t have the time. That’s why it’s crucial to have a good tax advisor who can stay on top of these changes and help you take advantage of them.
2. Reactive Tax Filing
Taxes should always be top of mind, not just something you think about when it’s time to file your return. They should be part of your budget and profitability plan.
Too many business owners wait until the end of the year to start thinking about their taxes. By then, it’s already too late to do anything to minimize their tax liability.
By proactively planning throughout the year, you can avoid a lot of the common mistakes that cause businesses to overpay in taxes.
You need to be continuously aware of your business’s financial situation and how it will impact your taxes. Then actively furnish your tax advisor with the necessary information and documents so they can help you make strategic decisions that minimize your tax liability. This way, you can be sure you’re taking advantage of all the deductions, credits, and tax breaks you’re entitled to.
3. Less Than Ideal Entity Structure
Your business structure plays a huge role in your tax burden. The most common forms of business are sole proprietorship, LLC, partnership, Scorp, and C-corporation.
Each one has its own tax implications, so you need to choose the right one for your business. And, as your business grows and changes, you may need to restructure to get the most favorable tax treatment.
For example, if you’re a service-based company operating as an LLC but are earning lowish-to-mid six figures, you may want to consider changing your LLC to an S-corp. This can save you a ton in self-employment taxes (up to 15.3%) and offer additional ability to contribute to your retirement accounts.
There are many more tax options available to corporations than there are to sole proprietors, partnerships, and LLCs. That’s why it’s crucial to consult with a tax advisor to ensure you’re taking advantage of all the opportunities available.
4. Working with a Full-Service Accounting Firm
A full-service accounting firm that provides a wide array of services, like audit, advisory, and many other services, is fantastic. But having a specialized tax planning firm allows that team to focus on protecting your profits from overpaying on taxes.
A good, data-driven tax team will work with you throughout the year to proactively plan and strategize around how to minimize your business’s tax liability. This way, you can focus on running your business and leave the taxes to experts with a proven track record.
Don’t Overpay. Plan Instead.
Most businesses overpay in taxes because they fail to plan ahead and take advantage of all the deductions and credits they’re entitled to. If you treat paying taxes as an annual event, you will likely overpay. Maintaining a good relationship with a specialized tax team and being proactive about your taxes can save you a lot of money and stress in the long run.
Besides, restructuring your business to an ideal legal structure, continuously monitoring your financial situation, and being mindful of changes in tax laws can help you avoid overpaying taxes. All these will lead to a healthier business and more money in your pocket.
At Phillips Business Group, we are a specialized, saving-focused tax team that have helped business just like yours save up to 6 figures in overpaid taxes.
We can help protect your profits through proactive tax planning, data-driven decision-making, and a focus on your business’s unique situation.
Check out our bespoke services or give us a call at 713-955-2900 to know how we can help you save on your taxes.