Income tax planning
Q. I’m planning on doing some equipment changes, so I’m worried about how much available cash I will need. So far this year I have a nice profit, and I’m also worried about how much taxes I might have to pay come next April. What do I have to do?
A. While you should always have an idea of your potential tax bill, this time of year is perfect for getting an income tax projection. You have nine months of operations to use as a guide to project your profit for the entire year and the related projected income and/or self-employment taxes.
Additionally, you have about two months left in the year to do planning and to alleviate any tax problems, if possible. You need to send us your income and expenses through September, along with any transactions that may have occurred during the year that could affect your taxes, such as equipment purchases, sales, capital gains, or withdrawals from your retirement plans.
We will project your profit for the 12 months of 2019 and the related taxes and then discuss potential problems, if any. Be sure to include any estimated tax payments you made.
Knowledge of your potential taxes is necessary to help plan for the near term. Decisions such as the equipment changes you want to consider, whether to take time off, to do that major truck overhaul, or even to remodel your residence hinges on your financial situation, including potential income taxes.
Q. OK. Unfortunately, I did not pay my estimated taxes so I will be sending the information you need immediately. I want to purchase a truck in the $90,000 range and possibly get rid of one. Am I in trouble?
A. You are not in trouble yet. Let’s proceed and see what we come up with. For projection purposes, we will assume you will purchase equipment in the $90,000 range and run some scenarios from there. We also will compare your income and expenses for the past two years in order to spot anything unusual. If you have not made any estimated tax payments, you may be facing additional penalties and interest which are costs you could avoid and they are not deductible.
Q. What is an income tax projection?
A. Think of income tax projection as a mini tax return done during the year using year-to-date results projected to reflect an estimate of full-year results.
Q. How is it done?
A. First you need to know your year-to-date net income as of a certain date then add to that the projected net income for the rest of the year. That will give you the projected net income from operations for the year. Then you make your adjustments, such as depreciation and per diem, (if applicable), to arrive at a projected business income for tax purposes. Then you can project what your taxes would be by preparing a preliminary tax return.
Q. What is the purpose?
A. To find out whether you will owe or get a refund and to adjust your estimated taxes accordingly. You may have to adjust your projection based on actual results going forward.
The benefits from the tax projection are as follows:
- Reduce potential penalties by not estimating your taxes accurately.
- Allow you plenty of time to do tax planning prior to the end of the year.
- Help determine the availability of cash regardless whether you will owe or get a refund. LL
This article has been presented by PBS Tax and Bookkeeping Service, a company that has been providing income tax and bookkeeping services to the trucking industry for more than a quarter century. If you would like further information, please contact us at 800-697-5153. Visit our website at PBSTax.com.
Everyone’s financial situation is different. This article does not give and is not intended to give specific accounting and/or tax advice. Please consult with your own tax or accounting professional.