Although it’s human nature to procrastinate, remaining ignorant of your tax liability can come back to bite you. Most businesses must remit taxes at scheduled times throughout the year. Failure to keep up with those estimated taxes triggers penalties.
New businesses may fall victim to underpayment penalties, particularly in the second year of a profitable enterprise. Even though such lapses may be unintentional, an entrepreneur may have to hand over a portion of profits in penalties levied by the IRS.
For first-year entrepreneurs the risk of incurring penalties is usually lower. Despite its fearsome reputation, the IRS doesn’t expect you to have prophetic abilities. So if you’ve underestimated income that first year when you file your tax return as a new entity there’s rarely a penalty.
The nation’s taxing agency knows many businesses fail to make a profit in those first few years.
The way to avoid underpayment penalties is to stay on top of your sales and expenses, so you can more accurately gauge your tax liability. As those sales begin to roll in on a consistent basis that’s when it’s time to tally not only accounts receivable but expenses, too.
Failure to take legitimate overhead expenses as deductions on your tax return hits your bottom line. Unfortunately, the IRS doesn’t make it easy to take every deduction an entrepreneur is entitled to, as the tax code isn’t the easiest tome to read. As a result some business owners hold more cash in tax accounts than is necessary to comply with IRS regulations. As a result, they miss out on maximizing the use of their capital.