Big Tax Mistakes Small Businesses Should Avoid

August 26, 2020 by First Federal Bank

Taxes-1Tax season is never a fun time of the year, but it’s important not to treat doing your taxes as yet another item to quickly cross off your to-do list, especially as the owner of a small business. There are a few common tax errors small business owners are prone to making, and avoiding them could save you a pretty penny.

 

Not practicing good recordkeeping

 

Whether it’s accidental or intentional, incorrectly reporting your income can have big consequences. “In the best-case scenario you’re asking for an audit,” Microsoft says. “In the worst-case scenario, you may face fraud charges.”

 

One of the best ways to avoid wrongfully reporting your income is to practice good recordkeeping all year round. It’s can be easy to store all of your receipts and other records away from sight until the time comes to fish them out during tax season, but this only makes it harder to get organized when you have to sort through everything all at once. Keeping good, thorough records throughout the year makes it a lot easier for you to accurately report your income when tax season arrives.

 

Not filing on time

 

Just like individual tax returns, business returns must be filed on time. Even if you file for an extension, fees and penalties can stack up faster than you might expect. “Your business will be assessed a five-percent per month penalty by the IRS that will continue to increase until the return is filed,” explains Alyssa Gregory, founder of Small Business Bonfire.

 

Additionally, if you do not pay owed taxes on time, fees and interest can quickly grow out of control. Interest starts at six percent, with a late payment penalty of half a percentage point each month after the April deadline.

                                                                         

Not separating business and personal expenses

 

As a small business owner, especially if the business is a sole proprietorship, it can be tempting to use a single credit card for all of your expenses. However, while this is more convenient during day-to-day activities, it can severely muddy the financial waters come tax time. Not separating your business and personal expenses makes it very difficult to tell legitimate business expenses and personal ones apart, and a single inaccurate expense deduction can draw your entire tax return into question.

 

“If you take your car out to run errands, you can deduct mileage for a drive to the post office to ship customer packages,” Microsoft says. “That side trip to the pet store for your cat’s hot pink claw covers, though? The odometer stops ticking the moment you leave the post office.”

 

Not paying estimated taxes throughout the year

 

If you are filing as a sole proprietor, S corporation shareholder, partner or a self-employed individual, you must generally make estimated tax payments quarterly if you anticipate owing taxes of $1,000 or more when your return is due. The IRS says that if you don’t pay enough tax through withholding and estimated tax payments, you can be charged a penalty.

 

Not using an accountant

 

Many small business owners have a do-it-yourself attitude. After all, it’s often that very mentality that leads them to start their own business. Thus, as a small business owner you may be tempted to do your business taxes yourself, using tax software and seeking no professional help. However, this could end up costing you more than hiring an accountant. “Not only do you run the risk of misfiling your return,” Gregory says, “But you may miss a few major deductions simply because you don’t know that you qualify for them.”

 

As a small business owner, it’s your responsibility to diligently maintain records of your business’s finances and report them accurately to the IRS. However, even the most honest and meticulous business owners can still make mistakes. For these reasons, it’s strongly recommended you hire an accountant to help you avoid tax filing mistakes.

Categories: Small Business, Taxes