Around 62% of business owners work 50 hours a week, and 19% work more than 70. It’s easy to see why small business tax mistakes are common. Worse, these mistakes can be costly. As part of my focus on small business tax advice, I want you to examine these 5 common mistakes and their solutions.
Filing late or sending incorrect forms
For small businesses with limited bandwidth and with only the help of a single accountant, it’s common to forget to send in certain required forms to the IRS and state tax agencies.
Here are the consequences for filing late:
- A 5% Failure to File Penalty is applied to the unpaid taxes for each month they remain unpaid. Although the penalty is capped at 25% of the total taxes owed, that’s not something any business owner wants to pay.
Sending the wrong forms is often attributable to a task overload and a misunderstanding of the tax requirements that apply to your specific legal organization, e.g., S-corp, LLC, LLP, or sole proprietorship, to name a few.
The end result of incorrect or incorrectly prepared forms are:
- delays that cause late tax filing
A cost-benefit analysis of corporate assistants conducted by the Harvard Business Review found that the benefits of outsourcing administrative tasks far outweigh their costs when executive salaries are compared.
The best solution to this problem is to hire a professional.
If your administrator is familiar with business structure, and tax forms, they should become your point person for interacting with an accountant.
Mixing business and personal expenses
Employees without a company credit card have no way to use business funds. It’s much different with business owners, especially when they have decision-making power about purchases big and small.
The result is an accounting quagmire when it comes time to file your Form 1040 or 1120 (for corporations).
- Never put a business expense on a personal credit card
- Never put a personal expense on a company credit card.
- Do not use the same checking account for business and pleasure.
It’s advisable to work with an accountant to review how business and personal expenses are separated if the underlying activity is mixed. For example, while airfare and hotel accommodations may be entirely deductible on a business trip, not every meal is tax deductible.
Misreporting income by under or over-reporting
Self employed individuals and owners of S-corporations are often required to make quarterly tax payments.
The IRS does expect estimations to be as accurate as possible within reason. Carelessness may lead to:
- An Accuracy Related Penalty of 20% to the underpaid portion of your owed taxes
Willful misrepresentation is fraud. Do not misrepresent your business income (which is your income in an LLC) ever for any reason.
A fix for the accuracy problem is business forecasting, which is achieved through various bookkeeping and accounting means. Gross profits (which becomes taxable income) can be estimated for the year and reported with reasonable accuracy.
Forecasting takes bookkeeping, accounting, and financial analysis. It’s also one of the outcomes of solid tax planning. For best results, take your financial statements to a professional.
Poor record keeping resulting in misreported business expenses
The necessary preoccupation of business owners with day-to-day operations is common. Another result of this necessity is poor record keeping.
Around 80% of business record keeping is still on paper, resulting in almost 8% of that documentation lost. Failing to maintain accurate and up-to-date financials is among the more costly small business tax mistakes. Opportunities that could significantly lower your tax burden are lost in the paper.
There is thankfully another simple solution to this problem, and that is to use business apps and software that make record keeping easier.
Intuit has developed apps that allow business owners to snap pictures of receipts, as well as GPS-based apps that track car mileage. Although you might be numbered among the business owners who are still reluctant to embrace software, an increasing number of businesses are finding that software provides vast benefits for concerns like record keeping.
Not taking the proper tax deductions available and applicable to the business
Business owners know their business but not the tax code. An in-house accountant or bookkeeper is not qualified to maximize tax deductions and credits. That means business owners can make perhaps the most serious mistake of all: losing money for no reason.
Here’s a temporary solution:
If you can’t afford a CPA firm, get familiar with all the deductions that might apply to your business. Think of the situation like a visit to the doctor. Advocate for your business. It may be enough to get your in-house accountant or take a closer look.
Here’s a better solution:
Schedule a discovery call with a certified public accountant (CPA)—especially one familiar with your type of business, especially one that’s proactive and follows changes in the tax code, legislation, and other regulatory impacts.
How can you avoid small business tax mistakes?
It sounds like a sales pitch, but here’s the truth: the easiest way to avoid small business tax mistakes is to bring your bookkeeping, accounting, and tax planning to a tax professional.
Look for an accountant who holds you accountable: to send the proper forms on time and participate in setting up a plan of action for sound record keeping: It’s necessary to maximize correct deductions and credits and create tax strategies that fit your business and goals.
If you’re a business owner in the Dallas-Fort Worth area, I can help. Give me a call or schedule a discovery call today.
Jeremy A. Johnson, CPA