Are you a small business owner and thinking of preparing your own personal income tax return(s) this year?
Business owners should not prepare their own personal income taxes. Here's why:
I recently met with a financial planner about one of our mutual clients. While I typically only handle corporate financial statements and tax returns for this client, the financial planner wanted to discuss some tax planning for our client's personal income taxes.
When I mentioned that the client typically does his own personal income taxes, the financial planner was surprised and asked why?
At the meeting, the three of us, the client, the financial planner, and I, sat down to discuss some strategies for the coming year, including how to move excess money from the client's company to his personal investments with minimal tax.
During the discussion, the client revealed that he has always done his own personal income taxes using tax software and felt that he was saving money by not paying for professional services. However, he was unaware that there were certain claims he could have made but did not.
In my opinion, small business owners should not be doing their own personal income taxes for several reasons.
While they may be experts in their business, they may not be experts in tax. Additionally, tax laws change every year, and it's important to stay up to date with these changes.
Professional accountants are trained and have years of experience preparing personal income taxes. We must complete professional development every year and take tax courses to ensure we stay up to date.
When business owners do their own taxes, they may miss out on claiming all the deductions and credits they are eligible for. They may also put themselves at risk of a costly audit by claiming or doing something they shouldn't.
Are you sure you have claimed everything you are eligible to claim? Do you know the strategies for claiming donations, medical expenses, and even RRSP contributions? Are you putting yourself at risk of a costly audit by claiming or doing something you shouldn't?
Suppose your accountant does not prepare your personal income tax return. How can they create strategies to optimize the movement of money out of the company at the most efficient personal tax brackets and rates?
We can advise on when to withdraw extra money, how much to withdraw, and how to best utilize RRSP contribution room. We can also determine the proper mix of wages or dividends to take from the company and whether or not a spouse should take wages or dividends.
While some business owners may believe they are saving money by avoiding paying for personal tax preparation, the truth is that the cost of personal tax preparation is the lowest cost as a percentage of total accounting fees and can yield significant benefits.
Suppose there's no proper plan for your whole tax picture. In that case, it can result in extra taxes, which can easily offset the savings of avoiding payment for personal tax preparation.
In Alberta, the small business corporate tax rate is 11%, while the personal tax rates top out at 48%. This means there is a more significant opportunity to avoid taxes on personal income.
A missed deduction on corporate tax could cost you 11%. Missing a deduction on your personal tax could cost you 25% to 48% in extra taxes.
By letting Zenally handle your personal income taxes, you can benefit from a holistic approach to their tax situation, leaving more money in their pocket at the end of the day.
It's also important for accountants to prepare personal income tax returns for both spouses. Taking a more holistic approach to the family's income taxes can allow for the optimization of income and expense splitting for the benefit of the family unit.
There are several opportunities to split or share income and expenses, including:
Doing personal income taxes takes valuable time away from making money in your business and can cause unnecessary stress. As a business owner, staying focused on making money will better reward your time and effort.
As we have discussed, there are numerous reasons why small business owners should not prepare their personal income taxes themselves.
While it may seem like a cost-saving measure, the potential benefits of having an expert accountant prepare your taxes can yield significant short- and long-term savings.
By allowing Zenally to take a holistic approach to your tax situation, we can create strategies to move money out of your company with the least tax cost, determine the proper mix of wages and dividends, and make sure all eligible deductions and credits are claimed.
When splitting income and expenses between spouses, having an accountant involved can result in even more savings.
Find out more about our personal tax return service for our business clients.
Why not avoid the stress and guesswork of tax season? Let Zenally help you keep more money in your pocket.
Phil is a Partner at the business accounting firm of Zenally Chartered Professional Accountants LLP.
For more than 30 years, he has sat face-to-face with owners of businesses of all sizes. He has listened to them, helped them identify their issues, and provided guidance.
Business owners have left with answers to their questions, less stress moving forward, and confidence that they have a business ally to call on anytime they need.
Interested in finding out more about Phil, his team and what they can do for your business? Check them out at zenally.cpa.
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