Tax Advice for Procrastinators

Look for hidden deductions, avoid shortcuts, and understand the extension process. And don't miss out on last-minute help from these sources

by Karen E. Klein

Procrastinating entrepreneurs get a break this year—two extra days to file their 2006 tax returns. Since Apr. 15 falls on a weekend and Apr. 16 is celebrated as Emancipation Day in the nation's capitol, the tax deadline this year is April 17. Still haven't completed (or started) this year's return? Keith Hall of the National Association for the Self-Employed (www.nase.org) offers some last-minute advice.

Don't take shortcuts or make up numbers. Even though time is short, it won't serve you well in the long run to pull figures out of a hat or substitute the numbers from last year's return on this year's document, Hall says, "People think they don't have the time to calculate correctly, but if you get a letter from the IRS about your return it'll be two years from now and you won't remember where you got the numbers and you won't have the receipts to back them up." Find the receipts that justify the figures on your return, add them up, and then keep them together. You may one day be very glad you did.

Check your math. Most of the mistakes on tax returns are simple addition and subtraction errors, and they lead to most of the inquiries the Internal Revenue Service makes about tax returns. Nobody likes getting a letter from the IRS. "Check your math; then check your math again," Hall advises. For some added peace of mind—not to mention accuracy—use an online tax calculator or tax software, such as TurboTax or TaxCut.

Look for "hidden" deductions. Flipping through your check registers for business deductions? If that's the only place you look, you may miss some major deductions that can help reduce your tax liability, Hall says. "If you work out of your home, your office may qualify as a deduction. Do you drive to the post office or a client site? Those miles may add up to a sizable deduction too," he notes.

Don't forget that retirement savings are deductible for last year's tax return up until this year's deadline—Apr. 17. "That means that you can count on your 2006 return money deposited into retirement savings plans or accounts up until Apr. 17, 2007," says Hall. If you're making personal contributions to a SEP-IRA, those can be made all the way up until the date you file your return, including extensions, and still count toward 2006.

Speaking of extensions, if you absolutely can't make next week's deadline, relax. All tax filers can get an automatic six-month extension by filing Form 4868 by Apr. 17. The form can be downloaded from the IRS Web site (www.irs.gov/newsroom/article/0,,id=154554,00.html). Just remember, filing for an extension does not mean you have an extra six months to pay any taxes due.

"If you do not send the IRS what you think you owe in taxes by Apr. 17, you'll be subject to late fees and interest," Hall says. How much money should you send along with your extension request? "Do a quick estimate and if you owe money, send the amount you've estimated. As long as you're within $1,000 of the total tax liability, you won't have to pay any penalties…" come Oct. 15, when your extension runs out.

Start thinking about next year right now. "Many small-business owners don't do much planning, and they only think about their tax situation once a year. As long as you're thinking about taxes, why not think about ways to reduce your 2007 tax liability?" Hall asks.

Consider deductions for a home office or employing your children; create a medical reimbursement plan, which would enable your company to reimburse employees for their out-of-pocket medical expenses; reconsider the tax implications of incorporating your business; and research retirement plans designed specifically for the self-employed, including IRAs, SIMPLEs, SEPs, and Single 401(k) plans.

Understand that you're not alone. Sole proprietors doing their own tax returns can find help from a number of sources. Start with the IRS Web site (www.irs.gov/businesses/small/article/0,,id=134947,00.html) and its toll-free help line, 800 829-1040. The NASE offers a line-by-line guide for completing your Schedule C business tax form (www.nase.org). Look for Schedule C from A to Z. You can also e-mail questions to the group's Tax Talk page and get them answered, for free, by a CPA within one business day, Hall says.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.