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Tax Season Is Upon Us!

Posted on June 18th, 2021

Tax Planning Attorney in Bozeman, MT

Tax Planning Attorney in Bozeman, MT

Well well, another year is down and here we find ourselves getting ready for another tax season. Thank heavens for the below 0 weather, as it’s forcing me to actually do my work today!

I have represented many individuals and businesses before the Montana Department of Revenue (“DOR”) and the Internal Revenue Service (“IRS”) from issues such as property taxes, to income taxes and even lodging facility taxes. Each different tax type has its own idiosyncrasies and each agency has its own ways of dealing with these different types of taxes.

Today, I want to give you my five biggest mistakes when it comes to taxes.

First, keeping good records. The easiest audit to perform for a tax authority is a lack of substantiation audit (not keeping good records to provide proof of your deductions). We see this one type of audit adjustment more than any other from the state and federal level. Auditors will always go for the low hanging fruit, by asking for your receipts. If you don’t have the receipts, then the auditor will deny the deduction and force you to either produce the records or face the tax consequences. The second issue in record keeping is that you keep the right records. For example, when it comes to deducting meals, you have to write on the top of the receipt who you are with and what you discuss. You don’t have to go crazy on your description, but you do have to write something on the receipt.

Second, we see a lot of issues with deducting personal expenses versus business expenses. The simple example is the deduction of clothing items. Technically, the IRS says that you cannot deduct clothing items, if you could use those clothing items for everyday apparel. I always tell people, if you are going to claim something as a deduction, that may look like a personal expense, then write on the receipt what the business purpose is.

Third, using personal accounts instead of a business account to cover business expenses. Making this mistake actually causes several problems. First, you have an accounting problem, because you have to balance out your books and reimburse yourself from the business for expenses you have personally incurred but are legitimate business expenses. Second, on an audit, this raises a red flat and will encourage the auditor to dig deeper into your business versus personal expenses. Lastly, from a non-tax standpoint, this could open you up to personal liability for things that your business should shield you from in the long run. Make your life easier and just get the business account and credit cards established and separate your business life from your personal life.

Fourth, trying to save on employment taxes by classifying employees as independent contractors. The Montana Department of Labor has a great website, dli.mt.gov, which really does an excellent job of describing the difference between an independent contractor and an employee. The simple description is, if you control the way they do their job and when they do it, then you are most likely an employer and have to withhold employment taxes on the person. It is also important to remember that employment taxes are a “trust” tax. This means that if you fail to submit the employment taxes to the state and federal government, then you can be held personally liable to repay those taxes. This is most definitely, the hardest tax to get away from, short of paying the entire amount, including penalty and interest.

Fifth, tax planning. I saved the best for last. A great accountant will help you plan for the next year’s taxes, but this takes two to tango. Around the end of the year, you need to have an idea of what your prior year looked like and then what are you expecting to happen in the upcoming year. Sit down with your accountant and plan/strategize for the upcoming year. Maybe, you have a problem with too much inventory, which messes up your cash flow and is non-deductible. Maybe you have a big expense coming up and you want to know how that will impact your cash flow and taxes. And maybe, you want to know, before year end, whether or not you should be looking for additional deductions that will help you earn more income. Whatever your issue is, you will not know it is an issue unless you are planning and prepared for handling it with your accountant.

Business is business, and we all can get caught up in just operating our business, only to find out that we are going broke or do not have enough money to pay our taxes. Whatever your situation, we are all in the same spot. Paying attention to your taxes is key to running a successful business. 

If you are facing a tax planning issue and need legal guidance, contact a tax planning attorney in Bozeman, MT, like the professionals at Silverman Law Office, PLLC.



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