Question

How do I assess whether or not I am overpaying my taxes? Is there a common approach I, or other small business owners, can apply to avoid this ­tendency?

Scott Fiori, Able Plumbing & Drain, www.ableplumbinganddrain.com

Answer

There are two basic approaches to determine whether you are paying too much in corporate federal income taxes. The first approach uses industry information to get a sense of what other companies of a similar size and same industry are paying. Three reference books can each provide the industry information you desire: "Almanac of Business & Industrial Financial Ratios," the Risk Management Association's (RMA) annual statement studies, and "Industry Norms and Key Business Ratios."

At least one of these resources should be available at your local library. For instance, RMA provides common-sized income statements by industry and company size. A business owner can compare what percent of net income he or she earns compared to the industry and from the net income one can extrapolate the taxes.

This approach is not perfect: Financial net income can differ from taxable net income and the RMA industry numbers are averages. Also, your type of business entity can affect taxes. C Corporations have their own corporate tax rates, where S Corps and LLCs are flow-through entities whose owners pay taxes based on personal tax rates. However, this approach is a common approach that any business owner can use to get a sense of where his or her business stands compared to the industry.

The second approach is more individualized. You can meet with your tax accountant in late November or early December and do some tax planning. When I was in practice, we would work with business owners to forecast total sales and expenses for the rest of the year, using the 11-month financial statements furnished by the business owner. Then, your tax accountant can provide specific advice for saving on federal income taxes.

About the author: Tim Lacine, M.B.A., J.D. candidate, 2014, University of St. Thomas School of Law