Welcome to finale of our four-part series: Four Ways You Are Paying Too Much in Business Taxes. Over the past four weeks, we have discussed some of the common mistakes that photographers make when filing their taxes and what you can do to avoid making them. Visit our blog to catch up on part one, two, and three.
Four Ways You Are Paying Too Much in Business Taxes
At times, professional photographers feel like they are bleeding money. The rent goes up. That annual conference you attend is on the horizon. Your employees need a raise. The list goes on and on. Of course, increasing revenue is a good way to help with cash flow, but we are also happy when we discover ways that we can save money as well. What I’ve found in working with scores of photographers is that many are overpaying their taxes and not taking advantage of deductions to reduce their tax burden. We previously discussed how charitable donations, mileage, and taking your numbers at face value, can affect your taxes. Today, we will take a look at balance sheets.
Did your balance sheet change?
Stick with me because the fourth way is a bit complicated. A lot of preparers working with sole proprietorships just take the numbers from the profit and loss and the income and the expenses, enter those numbers on the return, and file. But they leave out a key step, which is to make sure that the current balance sheet ties to the prior year's balance sheet. For all of our tax clients, even though the balance sheet is not reported on the tax return, we include a copy of their balance sheet in their tax file. The first thing we do when the next tax season rolls around is look at the balance sheet and make sure that the retained earnings total matches. I know that's a lot of accounting jargon, but basically what it means is if you're retained earnings number has changed for the past year after the return was filed, something changed in the prior year after the return was filed.
This happens all the time. You figure out that someone isn't ever going to pay you for that invoice so just go into the invoice and void it or delete it, right? The problem is that means you made the change after the taxes were filed, so you've already paid tax on that income that you never received. What should happen instead is if you paid tax on assumed income last year that never materialized, then this year you should get a deduction for that. You cheat yourself if you are not working with someone who works with businesses enough to know that they should check the prior balance sheet totals instead of just skipping ahead to looking at the profit and loss.
If you are not sure if your preparer does these things, ask them. If they say, "No, we don't check the prior year balance sheet," ask them why and see if they know. The answer is probably because it's not technically required, and they're really trying to get your return done in the least amount of time possible so they can get on with all of the other returns they have to do.
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