Common Tax Mistakes to Avoid As a Business Owner
Tax season can be an anxious time for small business owners. To prepare ahead and minimize stress during this stressful season, it is crucial to seek assistance from knowledgeable advisors as early as possible and maintain accurate records throughout the year.
An oversight on your taxes could cost you time, energy, and money in fines and penalties. Avoid these common errors to save yourself some time and stress: 1. Missing deductions.
1. Failing to Keep Receipts
Start today to avoid some of the most frequent tax mistakes by adopting best practices in your business. Receipting is the cornerstone of good bookkeeping practices; use an application like QuickBooks or Peachtree to track all income and expenses on a regular basis and reconcile cash flows against bank and credit card statements each month.
At all times when making purchases, make sure that a receipt is obtained for every single one and that each receipt includes notes about why it was made. This will come in handy come tax time if an audit occurs as well as prevent you from missing deductions you are entitled to claim. Being proactive with taxes is key for business success!
2. Failing to Separate Personal and Business Expenses
Utilizing your credit card for personal expenses while claiming those expenses on your taxes is one surefire way to trigger an IRS audit. While taking clients out for lunch or stocking up on office supplies may seem like legitimate expenses, keeping these separate is crucial in protecting yourself against an audit by the IRS.
Keep your personal and business expenses distinct to help with recordkeeping, filing tax season filing, building business credit and protecting yourself from legal issues stemming from mismatched transactions. Be sure to make all partners or employees aware of your separation practices to reduce confusion and create efficiency among team members; consider opening a dedicated bank account and credit cards specifically for business expenses.
3. Failing to Keep an Organized System
Filing taxes for your business can be complex and time-consuming, particularly if it is your first experience doing so. Numerous forms and payments must be submitted throughout the year including payroll tax, sales tax, property tax payments and self-employment tax as well as excise taxes for staff members.
Misreporting income is one of the most frequently made tax mistakes and could incur hefty fines from the IRS if discovered. The key to avoiding this mistake is having an established bookkeeping system in place that helps track income and expenses on an ongoing basis, rather than waiting until tax season arrives to do so. A qualified tax professional can also assist with creating a system to prevent personal and professional finances colliding.
4. Failing to Report All Income
Some small business owners think they can avoid their tax liabilities simply by labeling transactions as gifts or returns of capital, but this is an enormous miscalculation because the IRS looks beyond labels when considering transactions; any cash or trade received as compensation must be reported regardless of its amount.
But claiming deductions that shouldn’t be claimed can result in serious penalties from the IRS, who can quickly identify expenses that seem out of proportion with your income or what other similarly-sized businesses in your industry are spending. Furthermore, many taxes must be filed quarterly; any mistaken underpayment or failure to file can cost your business money in fines and lost productivity.
5. Failing to Take Deductions as Itemized Deductions
As a business owner, it can be easy to miss deductions that you are legally eligible to take. For instance, some people running businesses mistakenly claim home office and automobile expenses as itemized deductions instead of treating them with their business expenses – an expensive mistake considering you save both self-employment taxes and income tax by including these expenses as business deductions rather than itemizing them on Schedule A.
Due to recent tax legislation that nearly doubled the standard deduction, it may be worthwhile to assess whether itemizing makes more financial sense or sticking with standard deduction. Hiring an experienced bookkeeper or tax preparer can help make this determination.
Failing to pay quarterly estimated taxes can get your business into hot water with the IRS, and these hefty payments can really hurt a small company that already runs on tight margins.
