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Millions of taxpayers requested a six-month extension to file their 2022 federal income tax return. If you’re among them and haven’t yet completed your return, it’s time to get serious.
The extension runs out on October 16. While plenty of good reasons exist to file for the initial extension, you want to avoid missing this deadline. The penalties for not filing by then can get costly, and you need to shift your focus to your 2023 return.
Here’s how to wrap this project up.
1. Finalize your documentation
The biggest underlying reason people seek a tax extension is that they don’t have the documentation they need to file a complete, accurate return. Use these remaining months of your extension to sort through any loose ends and instill proper bookkeeping and recordkeeping systems so that you don’t run into this issue in the future.
Most business owners and investors are eligible for a long list of tax deductions. Make sure you have the proper documentation for any deductible expenses, such as business purchases, travel, education, training, charitable contributions and your home office. Double-check your documentation to ensure there aren’t any errors or omissions before you complete your return.
The biggest deduction available to entrepreneurs and investors with real estate holdings is depreciation. Taking this deduction correctly requires substantial documentation through a cost segregation analysis — this determines the schedule for depreciating each component of the asset.
Land, land improvements, buildings and building fixtures all depreciate at different rates, and a cost segregation analysis will help you accurately calculate the right amount of depreciation. For the 2022 tax year, bonus depreciation was still 100%, making this an even more powerful part of a tax strategy. But these studies take time, so make sure you are on top of this.
2. Check for possible tax credits
Tax credits can be even more valuable than tax deductions because they give you a dollar-for-dollar reduction in your tax liability. Yet, many taxpayers don’t take advantage of the credits for which they are eligible, either because they don’t know about them or because they’ve received bad advice about using them. Use your extension to make sure you receive the proper tax credits on your return.
The IRS offers a lot of information about tax credits on its website, and a tax advisor should be able to guide you through the process. Some of the many tax credits of interest for entrepreneurs and investors for the 2022 tax year include:
- Installing solar energy systems.
- Buying certain electric vehicles.
- Creating jobs in economically distressed communities.
- Providing certain benefits to employees.
- Hiring people from groups that have faced significant barriers to employment.
- Investing in research and development.
- Making your business accessible to customers with disabilities.
These are valuable tax credits — take them if they apply to you. Don’t pay more tax than you are required to pay. Invest that money back into your business.
3. Prepare your return
While you can use various tax software programs to prepare a return and file your taxes, entrepreneurs and investors benefit greatly from working with a high-quality tax professional. There’s simply too much money at stake and too much complexity to treat your taxes as a do-it-yourself project.
If you don’t have one already, look for a certified public accountant (CPA) who specializes in tax. As you speak with potential advisors, look for someone who takes a consultative approach. You don’t want to feel like just another transaction. You want a tax advisor who will be a trusted member of your wealth strategy team.
What happens if you don’t file?
It gets expensive. Being just a day late can turn into a penalty equal to 26% of the taxes you owed back in April.
If you’re still not ready to file your taxes by the October 15 deadline, you absolutely should be working with a tax advisor to navigate the situation. Your advisor will help you in two key ways. First, it’s possible you can get an additional extension. These are rare and mainly apply to people living outside of the U.S. or serving in a combat zone, but it’s worth checking. Second, and most importantly, a high-quality tax advisor will help you create a plan to get your taxes back on track.
Sticking your head in the sand is not a tax strategy, and facing your tax situation doesn’t have to be frustrating or confusing. A good advisor will help you understand the tax law so that you can use it in a way that gives the government what it wants while also legally and permanently reducing the amount that you need to pay.
The government wants people to invest in seven key categories (business, technology, energy, real estate, insurance, agriculture and retirement), and it offers great tax incentives to people who do so. Your tax advisor should be talking with you regularly about how you can build these investments into your wealth and tax strategy. It will allow you to make way more money while paying far less in taxes.