Tax Tips
Stop the guesswork and prepare an income tax projection

By Howard Abrams, PBS Tax & Bookkeeping

Q. We are having a good year, but at the same time we have not kept up with our estimated taxes. Even though we have money in the bank, we thought we would pay the taxes due next April. What should we do?

A. We need to prepare an income tax projection to know your tax situation. The good news is there is still time to alleviate potential tax problems. However, without a projection, everything is left to guesswork. When you look at your bank account and feel pretty good about the balance, you have to remember that a good portion of it may be earmarked for taxes.

You also need to maintain working capital so you are very wise to recognize not only that there may be a tax problem, but to do something about it. Holding off and paying the income taxes due in April makes no sense. Why pay penalties and interest? Both are nondeductible.

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 a full year’s 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. Make your adjustments such as depreciation and per diem to arrive at a projected business income for tax purposes. Then project what your taxes would be by preparing a preliminary tax return.

Q. We are spending way too much on repairs and fuel. Also, our truck is breaking down often so we’re losing revenue. It seems as though we should get a new truck. What do you think?

A. We agree. It looks like you should consider upgrading your equipment. When shopping for newer equipment, project your potential savings in fuel efficiency, repairs and maintenance.

But before the decision is made to buy newer equipment, you need to know your tax and financial situation. An income tax projection should be done so you can compare tax savings based on a purchase and/or lease and to reflect the sale or trade-in of your older equipment.

Factors that will affect your decision are cash flow, both short and long term; earnings potential; fuel efficiency; anticipated repairs and maintenance; and tax savings. Your tax preparer or adviser can then help to evaluate your situation so that you will have the knowledge to make an informed decision, including the affordability of the new monthly payments.

Q. I am having a really good year in 2014. When I look over my books in early December, I will likely have a larger net profit than I previously thought.  I want to reduce net profit in order to reduce income and self-employment taxes. I have several expenses that I have not yet paid. If I write checks for those expenses and mail them by Dec. 31, can I deduct the expense on my 2014 tax return?

A. Yes, you can deduct the expenses on your 2014 Schedule C as long as the checks clear when they are presented to the bank. If the checks are returned for insufficient funds, then you cannot deduct the expenses in 2014; instead those will be deductible in 2015.

On a side note, payment by check is deductible when it is delivered to the payee or when it is placed in the mail, but only if the check is paid by the bank to the payee. If at the time the check is presented to the bank, there are no funds in the account to cover the check but the taxpayer has overdraft protection and the bank honors the check, the deduction is still allowable in the year the check was given to the payee. If, when the check is presented to the payee he is instructed to hold the check or delay the cashing of the check because the taxpayer’s account has insufficient funds, the expense is not deductible in 2014. LL

 

This article has been presented by PBS Tax & Bookkeeping Service, a company which has been providing income tax and bookkeeping services to the trucking industry for over 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.