Taxes

20 Mistakes to Avoid in Small Business Tax Preparation

When owning a small business, it’s really important to understand the small business tax preparation process. If you make mistakes, you may end up incurring penalties, overpaying taxes and cause other errors. We talked to the experts and asked them to share some of the most common mistakes small business owners make when doing their tax preparations.

Here are the top 20 mistakes you should avoid when doing your small business taxes:

1. Improperly classifying an employee as an independent contractor.

Although you might be tempted to misclassify an employee as an independent contractor due to cost savings, it might be bad for your business. The rules for proper classification of a worker are strict and the penalties for failing to do so are high.

2. Making business decisions simply for the tax impact.

Too many businesses make decisions for a specific tax impact and not based on good business judgment. For example, if the only reason you are buying an asset is just so you can take advantage of the direct expensing, then it’s probably not a very wise decision.

3. Not making tax payments a priority.

Not paying your taxes can devastate your small business. Have enough money set aside for your taxes. And if you ever have to choose between paying your office rent or the IRS, you should pay the IRS.

4. Commingling personal & business funds.

Although this might seem obvious to some, too many small business owners still make the mistake of not having a separate business account. Mixing your personal and business finances will not only make the tax filing process hard, it can get you in trouble if you’re ever audited.

5. Procrastinating during tax filing.

Procrastination can sometimes be one of the most costly tax mistakes a business owner can make. Leaving your tax filings until the last minute can result in missed deadlines, IRS letters in the mail, penalties, and interest.

6. Failing to consult with a certified public accountant.

Regardless if your small business is your main source of income or just a side hustle, it’s recommended to consult with a Certified Public Accountant (CPA). Doing so, will ensure you get all the possible deductions as well as avoid common mistakes that can get you in trouble with the IRS.

7. Failing to pay your taxes.

Having unpaid taxes is just plain bad. The penalty for each unpaid month is 0.5% of your unpaid taxes. The longer you don’t pay, the larger the interest charges and penalties will be.

8. Not organizing your receipts in advance.

When it comes to filing taxes, not organizing your receipts can cost you a lot of money and headaches. It’s really important to have your receipts filed in an organized manner from the beginning of the year, all the way to the end.

9. Structuring your business incorrectly.

Your business structure has a huge effect on how your business is taxed. Having your structure as a C-corp, means you are taxed twice. If you have a sole proprietorship but don’t know how to properly account for things like self-employment taxes, you might also run into problems. Usually, an LLC or S-Corp are good alternatives.

10. Failing to pay “Trust Fund” taxes.

Any tax collected by a business from a third party needs to be held in a trust fund account until the time comes to pay it to the government. Usually, trust fund taxes are sales and payroll taxes. The government pursues unpaid trust fund taxes a lot more vigorously than unpaid income taxes.

11. Having disorganized financial records.

Properly documenting your business expenses will help reduce your taxable income. It’s very important to record all of your financial transactions. It’s recommended to use an accounting software to do this.

12. Not using the Section 179 tax exemption.

The Section 179 of the IRS tax code lets businesses deduct the full purchase price of equipment and/or software purchased or financed during the tax year. Many small businesses, however, are not aware of this tax exemption and its available accelerated depreciation. When buying or financing equipment, it’s important to know about this section because this deduction is “use it or lose it” if a purchase isn’t completed by year-end.

13. Not making yourself an employee of the business entity.

Being a business owner doesn’t automatically make you an employee. It’s recommended that you make yourself an employee with a reasonable salary. Not doing so may result in additional social security tax being collected in form of self-employment tax. Consult with a CPA or a tax lawyer to find out more.

14. Forgetting to file form 1099.

If you paid $600 or more to anyone that’s not incorporated during the last calendar year, you’re required to send them a 1099-MISC. This same form is required if you paid $600 or more for legal services, even if they are incorporated.

15. Not understanding the new tax bill.

Tax bills change and if you’re not familiar with the new bill, it can cost you money. One of the new changes for small business owners is that they can no longer deduct 50% of their client entertainment expenses. So those monthly golf outings with your clients aren’t deductible anymore. Good news is that meals are still deductible, so maybe hit the restaurant next time you have a client meeting rather than going out for golf.

16. Being unaware of the required use-tax.

Whenever you make a purchase from out-of-state vendors, whether it’s supplied from Amazon or monthly software subscriptions, you need to pay use-tax. Not doing so can result in penalties if you ever get audited.

17. Not reconciling your checking accounts with your tax returns.

The first thing the IRS does during an audit is to add all of your deposits in both business and personal accounts. If the total deposits are more than what was reported on the tax return, you will be accused of having unreported income.

18. Contributing too much to your qualified retirement plan or IRA.

Contributing to your retirement plan more than permitted by the law can cause a 6% excess contribution penalty being applied. Find the maximum allowed amount for contribution and don’t go over it.

19. Over reporting income.

Over reporting your income will simply lead to you paying more taxes than needed. If you sell goods, the collected sales tax should not be part of your reported income.

20. Not keeping a mileage log for business vehicles.

If you use your personal vehicle for business travels, you need to keep a mileage log and fuel receipts. Doing so means additional deductions during tax preparations.

Contributed by https://www.cpafirmnyc.com/

A post by Healthy_Living (9 Posts)

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