Although it’s human nature to put things off, if you don’t know what your tax liability is, that can come back to bite you. Most businesses must pay taxes at set times throughout the year.
New businesses may fall victim to underpayment penalties, particularly in the second year of opening a new business. Even though such lapses may be unintentional, an entrepreneur may have to hand over a portion of their profits in underpayment penalties.
For first-year entrepreneurs, the risk of having to pay a penalty is usually lower. Despite its fearsome reputation, the IRS doesn’t expect you to predict what you’ll earn ahead of time. So if you’ve underestimated income for your business’s first tax return, there’s rarely a penalty.
The IRS 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. That way, you can accurately estimate 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 costs you money that could be in your pocket. Unfortunately, the IRS doesn’t make it easy to take every legitimate deduction. That’s because the tax code isn’t the easiest set of instructions. It’s not user friendly! And that’s why some business owners keep more cash in tax accounts than is necessary to avoid an underpayment penalty. As a result, they miss out on using that money to grow their business.