Spend it wisely, and take a closer look at your quarterly payments

By Robert Tie, CFP

Congratulations - you've just received a sizeable check from the IRS! Sure, you knew it was coming and how much it would be. But still your pulse quickens, and you're mildly euphoric. Somehow this feels almost as good as getting cash from a client.
But is a large refund reason to celebrate? "Certainly not," says Eric Rigby, CPA, of RFG, Inc., a New Orleans tax and accounting firm that serves entrepreneurs. "Never give the IRS an interest-free loan." All too often, he says, small business owners do exactly that when they pay too much in estimated taxes. "So resolve to plan better next time," advises Bea L. Nahon, CPA, of Nahon CPA, a Bellevue, Washington firm providing tax and other services to small businesses. "Check in with your CPA at mid-year," she says. "You'll get better at managing your tax payments, and you'll develop a deeper understanding of all your business finances."


First Things First
What's the best way to begin the rest of your life as a taxpayer? The answer is to put your refund to work in the smartest ways possible. In working with their respective clients and also as volunteer advisers with the American Institute of Certified Public Accountants, Nahon and Rigby both recommend three sure-fire ways to get a big bang for your refund buck.

1. Set up an emergency fund
Cash flow is the lifeblood of any enterprise. And yet Rigby encounters enough undercapitalized businesses to make him worry with good reason. "When Hurricane Katrina slammed into New Orleans, a lot of small business owners saw their income plummet and their expenses soar," he says. "So priority number one is an emergency fund. Plan ahead, and you'll weather the storm."
How big a fund do you need? That depends on how long you might reasonably expect to be short of cash. A money market fund or other sufficiently liquid reserve will earn you only a minimal return. So use your refund to help set aside just enough to meet recurring expenses for, say, six months. Then spread your largest risks among highly rated disability, property, business continuity, and other insurers, as appropriate.

2. Pay down your debt.
"Do it now," says Nahon. You can't beat the cost benefit numbers behind this sage advice. Trouble is, spending money is more fun than repaying it. "Don't hesitate," she insists. "This is a perfect opportunity to improve your finances and your peace of mind."

3. Set up a retirement plan.
"It's never too early to start saving for retirement, and there are few better places to invest your refund," Rigby says. So, he advises, find out which type of plan is appropriate for your situation, and set it up.

The two types of retirement plan are:

IRA based plans

Payroll Deduction IRA

Simplified Employee Pension (SEP)


Safe Harbor 401(k)


Defined Contribution and Defined Benefit plans

Automatic Enrollment Safe Harbor 401(k)




Profit Sharing


Defined Benefit


Their characteristics are too complex to usefully summarize here. But IRS Publication 3998, Choosing a Retirement Solution for Your Small Business, concisely explains each plan. Read it through, noting contribution methods, limits, and other plan features that correspond to your needs and preferences, as well as those of your employees. You'll then be well prepared to consult your financial services provider and discuss your options.

Off to a Good Start
"Of course, if you've already addressed those three priorities," says Nahon, "consider using your refund to boost your marketing budget." A large refund, Nahon notes, is usually due to a significant drop in revenue, since small business owners typically try to avoid penalties by basing their current estimated payments on the total tax from their prior year's return. "That means it's time to put some extra money into marketing," she advises. "But first ensure that you've adequately funded your more urgent needs." Once you've fulfilled those goals, you'll really have something to cheer about.


Robert Tie is a Certified Financial Planner and business writer.

Prior to relying on any legal, tax or financial advice or recommendations provided herein, you are advised to consult with your attorney, financial adviser and/or tax professional to verify the information provided and to determine the applicability of any federal, state or industry specific laws and/or regulations that may apply to you. Bank of America shall have no liability for legal, investment, finance and/or tax decisions based on the information provided.

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