Take a proactive approach to your tax projection
Key takeaways:
- A good tax projection is proactive, which means evaluating the year ahead and planning for change.
- Having more income, fewer deductions or changes to the tax code can result in an unwanted tax surprise.
- Tax projections can help you save money and feel confident when it comes time to file your return.
Without proper planning and preparation, you may inadvertently underpay the IRS throughout the year, resulting in additional owed taxes at the end of the year and being at risk for underpayment penalties. As interest rates rise, so does the amount you may be out-of-pocket.
CWA Tax Director J.J. Anderson says, “Proactive planning and keeping up with your estimated tax payments matters even more now. Rates have changed significantly, and taxpayers will be required to pay the back taxes and the late payment penalties with interest rates near 8%.”
As a business owner, many of your tax obligations are pay-as-you-go. You withhold payroll taxes for yourself and your employees throughout the year. That includes federal and state income taxes, Social Security and Medicare taxes, and Federal Unemployment Tax Act (FUTA) taxes. While some are easier to set aside each pay period or quarter, estimating how much you will pay in Federal and state income taxes is a little more complicated.
To tackle this quarterly, a tax projection is made to estimate the amount of taxes you will owe for your next return.
The secret to a good tax projection is that it needs to be proactive, which means evaluating the year ahead and planning for change. When J.J. and the CWA team begin working with a new client, they can recognize the doctors coming over from a reactive accountant.
“Many CPAs are reactive. They typically take your prior year return, add 10% and tell you that’s how much you should withhold,” J.J. describes. “Sure, sometimes that works, but more often than not, it doesn’t, and you’re in for a shock.”
There are a lot of reasons why you might end up with an unwanted tax surprise, but J.J. says, for dental practice owners, it usually comes down to three things:
- More Income: An increase in collections or other income from the prior year is the biggest reason for increased taxes. Adding another production day, an additional doctor, or even a new procedure to the mix can make a big difference to your top line. Although this is a good problem to have, accounting for it in your projections is essential as you continue to grow.
- Fewer Deductions: As the title indicates, there are fewer deductions or expenses to offset income. A common example of this is Section 179. If you purchased a large piece of equipment or asset and claimed the whole depreciation deduction in the first year, you will notice a difference the next year in your taxes.
- Changes to the Tax Code: The tax code can have both big and small changes yearly. Election years and changing administrations bring an even greater potential for change. For example, the Tax Cuts and Jobs Act (TCJA) of 2017 is set to expire at the end of 2025. This act changed the individual tax rates and added the qualified business income (QBI) deduction. If that goes away, business owners will see a significant decrease in their deductions.
The good news is that these can be anticipated and planned for. A proactive CPA, like the advisors at CWA, takes the time to review the business’s profitability and discuss where you see it going next year. Are you bringing in a new associate, planning a renovation, or increasing fees?
When managed correctly, tax projections are a tax planning tool that can help you save money and feel confident when it comes time to file your return. CWA advisors implement tax projections based on historical data, projected income and expenses, and changing tax law so our clients can be prepared for the upcoming year.
“Many CPAs look at the past to anticipate the future. But, for our clients, we know they want and need more than that,” J.J. says. “CWA knows that both the business and the person are dynamic. We don’t just look at the numbers, we look at life.”
Growth in your business should be a good thing, not cause unnecessary tax surprises. Ready to have confidence in your plan? Contact a member of our team.
Accumulating Wealth Podcast Ep. 178, “When Your Tax Projection Derails”
In a recent Accumulating Wealth Podcast episode, hosts Hunter Satterfield and Judson Crawford discuss how tax surprises happen and how you can get ahead of it.
