I am normally pretty good about filing my tax returns well before April 15. But this year, I filed my tax returns on the extended deadline, October 15. I blame myself — mostly due to work with a helping of procrastination. I spent most of the prior weekend getting my records and receipts together. I soon learned that preparing and filing will create some problems that will cost me time and money.
The first was getting my records together. Thankfully, I have a fairly reliable (but not perfect) record keeping system. I have separate credit cards that I use for business and personal expenses. I also store most of my receipts in a separate envelope for every month. But I don’t have every single receipt because sometimes they get lost. This is usually the case for smaller expenses, but they do add up. Also, I have had many of these receipts for over a year and a lot of them fade making them illegible. Thankfully my credit card statement can serve as a backup, although the entries are less detailed. Which brings me to the next issue.
The second problem I had was trying to remember everything. Since I was grudgingly getting my records together over the weekend under time pressure, I am going to have a hard time remembering what I spent my money on over a year ago. And a faded receipt will not help. Now my credit card statement may help. If the statement shows that I purchased something at Office Depot or the U.S. Post Office, it is reasonable to believe that I purchased office supplies or stamps which are traditional business expenses. But a purchase at Victoria’s Secret is likely to be seen as a personal expense unless you work in the fashion industry. It gets a little tricky when you purchase something at Costco or Wal-Mart. These megastores sell office supplies in one aisle and chocolate ice cream in the next and your credit card statements are not going to show what you purchased. You may remember what you spent $1,000 on, but you likely won’t remember what you spend $4.99 on.
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The third — although minor — problem was getting frequent calls and emails from my tax preparer who had questions about my expenses. While the calls were annoying, I understand that he was also pressured for time. Also, I’d rather have a tax preparer ask questions and tell me if something is incorrect rather than blindly inputting numbers onto a piece of paper.
The above covered the problems I faced when getting the paperwork in order before actually getting the tax returns finished. When the returns were done, it turns out that my tax bills were a lot higher than I thought. This means I not only had to pay the shortfall, but I also had to pay penalties and interest on that shortfall. What happened was my increased income put me in a higher tax bracket and disqualified me from certain deductions I was used to claiming. Also, assuming that my income will be similar for 2018, I will have to save additional money for taxes or find ways to reduce my taxable income. I will also have to check to see if I qualify for the 20 percent income deduction under the new tax law.
Whether you filed on time or if you filed at the last minute like I did, here are a few things you should do between now and the end of the year.
If your income is high enough, consider incorporating your practice. The most common option is to set up an S-Corporation although more people are considering setting up a C corporation in order to take advantage of the flat 21 percent tax rate. By setting up an S-corporation, you can reduce your self-employment tax because S-corp income is not subject to the self-employment tax. However, the IRS knows about this potential tax dodge technique so they require the owner-shareholder to be paid a “reasonable salary” as an employee. This reasonable salary will be subject to FICA payroll taxes which must be paid. Another disadvantage to the S-corp is that the salary may also be subject to state employment taxes. Finally, a corporation files a separate tax return so your tax preparer may charge you extra to prepare them. So while you may save taxes, make sure that the extra costs does not exceed the tax savings.
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Also, consult with a tax professional for year-end planning. One question you should ask is if your firm’s projected net income will qualify for the 20 percent business deduction under the new tax law. Generally for lawyers, they qualify if their qualified business income (QBI) is under $315,000 for married filing jointly or for single people whose QBI is under $157,500.
So today’s public service message is to not make the same mistake I did and get your taxes done at the last minute. Get in the habit of writing a monthly expense report and making quarterly tax payments. This way, you’ll minimize your chances of forgetting deductible expenses, avoid stressing yourself out by doing everything at the last minute, and minimizing or completely avoiding penalty and interest payments. Your future self and your tax preparer will thank you for this.
Shannon Achimalbe was a former solo practitioner for five years before deciding to sell out and get back on the corporate ladder. Shannon can be reached by email at [email protected] and via Twitter: @ShanonAchimalbe.