Top Ten Mistakes Small Businesses Make In Their Taxes
June 20, 2016
Doing it yourself. The federal tax code is tens of thousands of pages long, with hundreds of complicated industry-specific items. If you really want to maximize deductions you need an expert. Besides, your focus should be on growing your business, not learning the minutia of the tax code.
Using the wrong legal entity. If your small business has grown but you still have a sole proprietorship designation, it isn’t helping you. Sole proprietorships are one of the most audited business types. Different entity designations allow for more deductions in some scenarios, and also allow for greater legal protection.
Mixing expenses. Too often small business owners do not correctly distinguish personal expenses from business expenses. It may not seem like a big deal to forget the odd expense here and there, but they add up quickly—costing you money and potentially triggering unnecessary audits.
Not properly classifying employees. The rules for classifying employees and independent contractors aren’t as vague as you would think. You should ask yourself: a) Do you dictate how, when and where the person works? b) Do you reimburse their expenses or provide supplies or tools at no cost to them? It’s important that you get the classification right and treat them appropriately from a tax stand point.
Not taking all the deductions for large purchases that a business may be entitled. Some tax preparers are too quick to capitalize large equipment purchases or do not take advantage of every tax credit available at the state and federal level. Tax code is replete with rules that allow large purchases to be expensed in the year of purchase instead of dribbling the deduction over the tax life of the asset.
Not properly planning for taxes. How often do you rush to finish your taxes just a week or two before the filing deadline? All business owners should practice “forward taxation” by looking at tax consequences throughout the year. This helps you stay on top of operations and get a better net effective tax rate.
Not keeping accurate records. That shoebox full of receipts isn’t good enough. There are many effective digital tools available to simplify keeping track of your expenses and receipts without overwhelming you with scraps of paper.
Not using carryover deductions. You may have had $10,000 in expenses one year but were only allowed to deduct $5,000. The remaining $5,000 can be used the following tax year.
Not filing on time. Often small business owners end up filing extensions because they aren’t prepared to complete their returns on time. If you owe on taxes you will be paying as much as a 5% penalty for every month your return is late, up to a maximum of 25%.
Using the wrong tax professional. Too many small business owners are using a tax preparer that may be registered with the IRS to assemble and file tax returns, but do not have the years of public accounting a CPA has in helping businesses take advantages of the processes, regulations, and tax laws necessary to being truly competitive on a long term basis.