How To Deal With An Unexpected Tax Bill
Jack, the owner of a thriving healthy beverages business, had always prided himself on his meticulous financial planning. However, at the end of financial year, he received an unexpected tax bill that threw his plans into disarray. Initially, panic set in, but Jack quickly realised that he needed a structured approach to navigate this financial surprise. Here’s how he tackled the situation and how you can too.
Stay Calm and Assess the Situation
Don’t Panic
The first and most important step is to remain calm. Panicking won’t help; instead, take a deep breath and prepare to address the issue logically. Jack knew that letting anxiety take over would cloud his judgment, so he decided to approach the problem systematically.
Review the Tax Bill
Carefully review the tax bill to understand why you owe these taxes. Check for errors in calculations or misreported income. Jack noticed a discrepancy in reported sales and immediately contacted his accountant to verify the details.
Verify the Details
Contact the tax authority or a professional accountant to verify the accuracy of the tax bill. Sometimes, the bill may include penalties or interest that can be disputed. Jack’s accountant helped him understand the details and identify any potential errors.
Create a Payment Plan
Evaluate Your Finances
Assess your current financial situation to determine how much you can afford to pay immediately. Jack reviewed his cash flow and realised he could cover a portion of the bill upfront but needed a plan for the remaining amount.
Negotiate with Tax Authorities
Reach out to the ATO to discuss payment options or get your tax accountant to do this on your behalf. Usually the ATO can offer installment plans or payment deferrals. Jack called the tax office and successfully negotiated a monthly payment plan that was manageable for his business.
Set Up a Payment Schedule
Once you agree on a payment plan, set up a schedule and automate payments to ensure you never miss a deadline. Jack set reminders and automated transfers to stay on top of his payment plan, avoiding additional penalties.
Adjust Your Budget
Cut Unnecessary Expenses
To free up cash, identify and cut unnecessary expenses. Jack decided to temporarily reduce his marketing budget and postpone a planned equipment upgrade. This adjustment provided the extra cash needed to meet his tax obligations.
Increase Revenue Streams
Look for ways to boost revenue, such as launching a new product, running promotions, or increasing prices slightly. Jack ran a promotion on some excess stock, which quickly increased his sales.
Avoid Future Surprises
Regularly Review Financials
Make it a habit to regularly review your financial statements and tax liabilities. Jack scheduled quarterly reviews with his financial advisors to stay informed about his tax obligations and financial health.
Set Aside Tax Reserves
Create a tax reserve fund by setting aside a percentage of your revenue each month. Jack started allocating 15% of his monthly earnings into a separate account dedicated to tax payments. This strategy ensured he was prepared for future tax bills.
Use Accounting Software
Invest in accounting software to track your income, expenses, and tax liabilities accurately. Jack upgraded to a comprehensive accounting system that provided real-time financial insights and tax projections. Your accountant or financial advisor can give you some recommendations on the best system to use for your business.
Seek Professional Help
Consult a Tax Advisor
For complex tax situations, consult a tax advisor who can offer specialized guidance and strategies to minimize your tax burden. Jack’s tax advisor helped him identify tax credits and deductions he was previously unaware of, reducing his overall tax liability.
Hire a Finance Business Partner
Consider hiring a professional finance partner or Virtual CFO to sort out your finances, manage your cash flow and implement a financial forecast. Jack’s decision to work with a Virtual CFO proved invaluable in navigating his unexpected tax bill and improving his overall financial strategy.
Conclusion
Dealing with an unexpected tax bill can be daunting, but with a calm approach, strategic planning and the right professional expertise, it’s manageable. By staying calm, verifying details, creating a payment plan, adjusting your budget, and seeking professional help, you can navigate this challenge successfully. Jack’s story shows that with the right steps, you can turn an unexpected tax bill into a manageable part of your business operations.