Once again, tax season is just around the corner. Filing personal taxes is tedious at best, but filing taxes for business is even more so. If you’re a small business owner, you’re bound to have your hands full.
In the hustle and bustle of tax season, it’s easy to forget that just one or two minor mistakes could cost your business valuable money. Some mistakes can even draw the scrutiny of the IRS—which could cost your valuable time (not to mention legal expenses).
Take a look at 7 common tax mistakes that small businesses make and how you can avoid them.
1- Choosing the Wrong Business Entity
This is one of the first decisions you have to make when you start up a business, and it’s also one of your first tax decisions. The type of business entity you choose will affect the way that you file taxes and claim deductions, as well as the types of taxes your business may incur. There are several different kinds of business entities, including:
- Sole Proprietorship
- General Partnership
- Limited Partnership
- Limited Liability Company (LLC)
- S Corporation
You shouldn’t choose your business entity solely on tax considerations, but taxes should be a principal factor. Review the tax requirements of each business structure and determine how your company’s finances will be affected by each.
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2- Late Tax Filing
Filing taxes late will incur tax penalties from the IRS. The longer you wait to file, the higher the tax penalty will be.
Sometimes, you’ll be overloaded with work, or you might have unforeseen issues arise in your personal life that make it near impossible for you to get your company’s taxes filed on time. If that’s the case, you could always file an extension. A tax extension is a request to the IRS to get 6 additional months to file your tax return (meaning that you’d have until mid-October to get your taxes filed).
Don’t forgo filing your taxes just because your company can’t presently afford to pay its tax debt. The IRS places heavier penalties on late filings than on making late payments on tax debt.
3- Not Keeping up with Bookkeeping
One of the main reasons that businesses file taxes late is that they’re not prompt about keeping financial records up to date. If you haven’t kept financial records updated, you’ll find yourself scrambling to assemble weeks or months of transactions. You’re busy enough during tax season, and all this extra work will slow you down and potentially keep you from filing your taxes on time.
You should consider accurate bookkeeping a year-round tax necessity. If you’re struggling to keep records updated, use financial management software to digitally record transactions and have financial statements automatically prepared for you when it’s time to file.
4- Over or Under-reporting Income
If you over or under-report your company’s income, you could possibly receive a tax audit from the IRS. An incorrect income filing can make it appear as if your business is trying to avoid taxes or mislead stockholders.
It’s easy to make an honest mistake when you’re reporting your income, especially if you run a business with a large number of transactions. The trouble starts when you purposely mislead the IRS about your finances—if that’s the case, you could be prosecuted for tax evasion. Be sure to keep records of all cash transactions, and don’t pay any employees under the table.
5- Not Separating Personal Expenses
Be sure to separate your personal expenses from your business expenses. Business expenses include:
- Travel costs for business trips
- Expenses on business materials, like office supplies
- Company lunches or dinners
However, your business expenses should never account for personal expenditures, like your family vacation or purchasing a new car. You could receive heavy financial penalties, an audit, or even prosecution for improperly reporting your expenses.
6- Missing Deduction Opportunities
Although tax filings may take a significant amount of income away from your business, you also have lots of opportunities to claim tax deductions or protect a portion of your company’s income from being taxed.
Small businesses can claim tax deductions on:
- Contract labor
- Employee benefit programs
There are numerous other tax deductions you can benefit from. These deductions can save your company an incredible amount of money. Although you might feel like you just want to get through taxes quickly, you should absolutely take time to determine what deductions you can claim.
7- Not Paying Estimated Taxes
While your business will have to pay taxes during tax season, you’ll also have to pay taxes throughout the rest of the year. Estimated taxes are taxes on your company’s estimated earnings as the year progresses, and you’ll have to pay them quarterly. Don’t ignore estimated taxes. You’re legally required to pay them if your company’s tax liability is $1,000 or more per year.
The Bottom Line:
Many small business owners feel disgruntled around tax season, but there are lots of opportunities to save money for your company and prevent an audit by the IRS. Just avoid these 7 common mistakes and your business will skate through tax season unscathed.