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:
Limited Liability Company (LLC)
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.
2- Late Tax 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,
financial management software to digitally record transactions and
have financial statements automatically prepared for you when it’s time to
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.
Expenses on business materials, like office
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
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
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.