I was talking to a prospective client this week as they were preparing their records for the tax accountant. They asked me a couple of questions which I was happy to answer. As we got off the phone it occurred to me that this is a process taking place in millions of businesses across the country at the same time.  Most are preparing for the annual migration to the tax preparer. Many have been preparing all year and the round trip will be completed without undue stress. Those not prepared are scurrying around in search of the records, making journal entries, posting transactions for many months in arrears in an effort to get the books closed for the year, and the information to the accountant by some preordained deadline. This scurrying around is stressful and frequently results in a catastrophic outcome; a tax bill that can’t be paid when due.  

The following is a scenario that many business owners face every year (feel free to exchange buying a machine in the below scenario with any of the following:  pay discretionary bonuses, make distributions, take vacations, etc.):

SCENARIO: You made it through the year. It was not a great year but you have cut expenses, focused on increasing your revenue, and you made it through with some cash in the bank. You do a quick assessment of your upcoming operating costs and decide that you have some “excess” cash. So you decide to buy that new machine that you have been waiting on. The problem is that you overlooked one tiny little detail. You have no idea what your tax bill is going to be and you just spent a significant amount of money. You could be playing “Tax Payment Roulette”. Are you spinning the “wheel of misfortune” and hoping for a tax payment small enough that you can actually pay it by the due date? This is an extreme example. Most of the time the spending occurs over the year. You don't realize that you borrowed from Uncle Sam until it is too late.

So what causes you to play Tax Payment Roulette?

1)      You don’t review expenses and balance sheet items until after year-end, if at all, because you have not received accurate and timely financial statements.

2)      You provide your tax accountant with your information without really reviewing it and expect the tax return to comeback correct. Mostly because of #1 above.

3)      You don’t review your tax situation with your tax preparers until you provide them with your information at the end of the year. Or, worse yet, when you recieve your tax return back with a payment voucher and the invoice from the tax preparer.

4)      You don’t review that tax return for obvious errors, misclassifications, etc. before you write the check and send the return.

You go through the same process every year. And, after getting your surprise bill, you vow that you will stay on top of the situation. You have been reliving this for the past few years but it doesn’t have to be this way.  Below are some steps to take to keep from spinning the wheel:

A)     Make sure that you receive accurate financial statements on a monthly basis. Enlist the aid of a trusted advisor if necessary to review your financial statements with you on no less than a quarterly basis. Have them work with your staff to ensure the proper posting of transactions. 

B)      Your advisor can review the information with you and your tax preparer to help ensure that everyone has the info that is necessary for a correct return.

C)      Calculate your tax liability on a monthly basis so you know always what your tax liability is likely to be. Again, it may be advisable to enlist the aid of a trusted advisor.  This will facilitate making timely and accurate estimate payments. And yes, even if your business is one that is a “pass-through”.

D)     Review your return with your preparer to make sure you understand the return. Take as much time as you need.  Make sure you understand why the income on the return is different than what was on your books. If you do not feel comfortable doing this then work with your advisor. This may also be a good time engage in some tax planning for the current year.

 Will this year be different, or will you spin the “Wheel of Misfortune” once again? My advice to you is don't. Get help.