Common tax mistakes can be expensive
Common tax mistakes can be expensive
Some examples not to follow
What is the law of unintended consequences? Here are three examples of how that law operates in the tax world, according to Ted Feher, senior manager for Horne CPA Group in Houston:
• A typical tactic used to reduce income tax liability is to purchase equipment and elect to write it off quickly. But if you have already purchased a great deal of equipment, you may not qualify for the election or your accountant already may have figured this in to the tax strategy.
• You may believe you can contribute the maximum to retirement plans but find out differently once you have all the demographic data for the current year. In one case, an employer believed the liability for her employees would be very small because they did not work much of the year. But once the calculations were done, the choice became: a) no retirement plan contributions for the employees then none for the owner, or b) pay some of the employees and former employees even though they would normally not be covered.
• Many cash-basis taxpayers believe that just because their cash balance is zero they have no tax problems to worry about. The cash-basis taxpayer must become acutely aware of which expenditures yield immediate tax deductions and which ones don’t. The purchase of a large piece of equipment may eliminate the cash balance, but it is not likely to give you a dollar-for-dollar tax deduction. The year-end Christmas party can be expensive, but it will only yield a deduction of 50 cents on the dollar. Officers’ life insurance will use a lot of corporate cash, but it won’t yield any tax deductions. Estimated tax payments deplete your cash balance also, but they don’t impact taxable income.
The only way to ensure you don’t suffer from those unintended consequences is to sit down with your tax advisor before executing any alternatives. He or she can even prepare a simulated tax return, one of the best ways to nail down the potential tax liability with the fewest surprises.
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