If you are filing a tax return for your business as a partnership or an S Corporation reality is rearing its ugly misshapen head out of the ashes of the previous tax year.
That’s because it’s time to do that return.
No putting it off until April for you, either. These two returns are both due on the 15th day of the 3rd month of the tax year.
For the majority of us electing to be taxed on the calendar year, in other words, that’s March 15th.
Not April.
Cheer up! Want to know why?
Two huge reasons. One is (unless you had corporate stock as a C Corporation before electing S Corp) that you don’t pay tax with this one.
You are creating an informational return for the IRS and your state. And you’re creating a Schedule K-1 for you and all of your principals or partners that is the source of information for your 1040.
That’s the one you pay tax on.
Understanding Tax Liability
If you make over $400 a year as a self-employed entrepreneur you have to report it.
That’s a very low bar to clear. $33-ish a month.
Why such a ridiculously low floor on reporting? Because of FICA.
The Federal Insurance Compensation Act (hence the acronym) is what I and my firm use as shorthand to refer to Social Security and Medicare taxes, because that’s what it is, essentially.
FICA has its beginnings in 1935, but what we deal with today is a result of 1965 legislation.
It’s unavoidable, it is non-negotiable, and if you make money in the good ole U.S. of A. you have to pay it.
On every penny you make as an employee, and also if you are self-employed and clear that $400 floor.
Good Lord knows we have to have that $56.52 in the Treasury to fund my impending retirement benefits.
As a self-employed entrepreneur filing a Partnership or S Corporation return you have to file no matter what, and if you end up with a net loss after all expenses you want to file anyway.
Why? Because of the Net Operating Loss.
If you are unable to take the entire loss against other gross revenue in a particular tax year you can actually carry forward that loss to future years until you zero it out.
But here’s the other thing. If you have established a precedent of these filings in past years you will get hit with an ugly penalty that accumulates monthly for a whole year if you don’t file.
If you have 3 partners and blow off your Partnership return for over year that’s going to cost you over $7500.
They call it a failure-to-file penalty.
The easiest way to avoid the ridiculous and egregious penalties of the IRS is to simply avoid them by being aware of the deadlines.
That’s where a good non-equity business financial partner comes in. If I work for you, you’ll never have to worry about this unless you came to me as a new client with these problems already occurring.
Even More Tax Liability
With all this talk of penalties and FICA let’s not lose sight of the big Kahuna of the tax code.
The Income Tax.
That’s right, FICA is a separate and secondary tax with no escape and no relief.
At least with the income tax there are possibilities of relief.
Deductions and credits are what we’re talking about here.
A deduction reduces gross income to a low number, upon the final bottom line known as net income.
A credit, on the other hand, actually reduces tax. I can think of three of them you most likely know about.
The earned income tax credit is available to people that work with a certain maximum income, according to the number of dependents, and is fully refundable.
That means if you owed $3,000, and had $4,500 in EITC, you will get a $1,500 refund.
The child tax credit, or CTC, which was inflated dramatically in new and creative ways in 2021, and is now back down to Earth at a rate of $2,000 per child 17 or under.
Residential energy credits. I like this one, because it encourages green investment habits. If you put solar on your home you can likely get 30% of it back the following year when you file your taxes.
I am also a big fan of the college duo, American Opportunity and Lifetime Learning Credits.
They could both do more to make school a little more affordable, but every little bit helps for sure!
So…Until Next Week…
I went on a little bit of a tangent concerning Form 1040 deductions, and the reduction of household income just now.
Next week in Part Two I’ll take a much deeper dive into the heart and soul of our practice and what interest our own physician and other business owner clients.
Business deductions.
In the meantime, physician entrepreneurs, if you would like to discuss how having a non-equity financial partner guiding your practice’s business future can increase your wealth, reduce your taxes, and provide the peace of mind that will allow you to put 110% of yourself into your patient care goals?
We would like to talk to you as well.
We are accepting up to two new business advisory clients in the upcoming month of February.
Use the link I’m providing below now to choose a time to talk most convenient for you.
You will also receive your own copy of 5 Mistakes Physicians Make That Hurt Cash Flow, just for booking a call.
Imagine having a financial coach and compliance expert by your side, so that you can focus your professional clinical time where it belongs: on patient care.
Does that sound good?
Then reach out to me, and let’s talk: Free Profit & Cash Flow Analysis