With less than a month before the April 15 deadline for filing tax returns, many small business owners are still trying to find ways to ease their tax burden. But this isn’t the time to be making impulsive decisions.
For example, you can’t decide now that you want to change your accounting method for 2004. And you can’t choose whether your workers were independent contractors or employees. And you can’t come up with expenses by writing checks now.
“Whatever activity ended on Dec. 31 really ended on the 31st,” said Gregg Wind, a certified public accountant with Wind Bremer Hockenberg LLP in Los Angeles.
But there are some tax-saving steps that are still possible, even as the deadline approaches. But first, the can’ts.
* Accounting methods, cash vs. accrual. Unless this is your company’s first return, you can’t decide now that you’d rather be using a different method of accounting. In short, the cash method recognizes income when it’s received and expenses when they’re paid, while the accrual method calls for income and expenses to be booked when they’re owed. No matter which one you’ve been using, the only way to change is to file IRS Form 3115, Application for Change in Accounting Method. You can’t just choose another method in the middle of preparing last year’s return.
* Employee vs. independent contractor. This also is not the time to decide the status of the workers you hired for a project. Whether they were employees or independent contractors depends on the circumstances under which they worked, such as whether you directly supervised them or had control over their work hours. The more control you exercised, the more likely they were employees. This is not something you can decide after the fact.
If the worker was an independent contractor, you should have issued a 1099 form, with a copy sent to the IRS. It’s not too late to do that, but Wind said you’ll have to pay a $50 penalty for each late form. If the worker was an employee, you should have paid quarterly Social Security and Medicare taxes, and unemployment and workers’ compensation insurance premiums during 2004. If you haven’t, you’ll likely owe a penalty for paying them late.
* C corporation or S corporation. This is another change you can’t make at this point. C corporations are traditional corporations, where the company is taxed on its income and pays dividends to shareholders who are then taxed on that money. In an S corporation (the names come from Internal Revenue Code provisions), the company isn’t taxed, and its income is passed on to shareholders similar to the way a partnership operates.
Once you’ve elected one form of corporation or another, you can’t switch, Wind said. But if you are the sole shareholder in an S corporation and the business is still quite young, say a year old or less, Wind said the IRS might permit a change if you didn’t receive proper advice.
* Creating expenses. Many accountants have stories about clients who say, “Oh, I can just backdate a check” to squeeze another expense into the old tax year.” But that’s not legal. And if you are audited, IRS agents notice things like out-of-sequence check numbers.
Still, all is not lost. Wind said there are some changes you can make at this late date.
First, look at your personal checking account and credit card statements. “See how things were classified,” he said. “You can look at things you might have paid personally or with cash but forgot to run through the business account.”
Also, if you don’t already have a retirement plan set up, you can still create a SEP, or Simplified Employee Pension. You have until the due date of your return, including extensions, to set up the plan. If you have another kind of plan already in place, you also have the same leeway in making your 2004 contributions.
A final bit of advice. It’s getting late in the season, and if you haven’t already set up an appointment with a tax professional, you might find yourself needing to file for an extension of the April 15 deadline, because CPAs, lawyers and other tax preparers are often overbooked.
“We try to cut off client meetings by the end of March,” Wind said. “We need the last two weeks to finish everything we have.”
Building Small Business is a weekly column on the topic by The Associated Press.