Here are some frequent mistakes you might make as a small business owner when it comes to taxes. We’ll take a look at some common errors, while simultaneously moving through some easy solutions to staying on top of those taxes this next fiscal year.
Not Keeping Organized Records
As a small business, it is all too easy to fall into the trap of not keeping clean, accurate records. At times it can get a little messy, and this can be problematic when it comes to preparing a tax return for two main reasons. First, tax deductions can easily fall through the cracks in messy record keeping, and second, if you do get audited and do not have the proper records for the deductions you have claimed, you could lose those deductions, aka lose money. Use reliable accounting software and utilize the help of a professional if need be.
Over Reporting Income
If you sell goods that collect sales tax, you do not need to report the sales tax in your reportable income. Make sure to subtract that before reporting the sales income.
Failing to Realize Deduction Limitations
In the first year, no more than $5,000 of start-up costs can be written off in tax deductions. $5,000 more in deductions is allowed in start-up costs but under the category of “organizational costs.” As for meal and entertainment expenditures, only 50% of those costs can be deducted in taxes.
Failing to File on Time or Failing to Pay on Time
Failing to pay on time will end up being less costly than failing to file, so rather than doing nothing, if you need an extension, make sure to file a 4868 form for sole proprietors or file a 7004 form for any other kind of business.
Not Claiming the Home Office Deduction
Many small businesses do not claim the home office deduction, thinking incorrectly that it is a signal to wave over the auditors. As a CPA in Lombard, IL I see this a lot. However, over half of all businesses are now run out of home offices, so it is actually very common, and you can claim this tax deduction by deducting the actual expenses or taking the IRS-set simplified rate.
Misclassifying Staff
Double-check that the people you hire as independent contractors would not actually fall under the category of “employee.” This can be an expensive mistake for payroll tax penalties, and it could be something as simple as these independent contractors needing to work certain hours or work on-site.
Focusing Solely on Income Tax
Payroll and sales tax can be easy to forget about but are significant costs as well when considering taxes.
Not Seeking Help
Taxes can be confusing, especially when you want to spend the majority of your time doing what you do best as a small business. There is no shame in frequently consulting accountants or bookkeepers to help keep your business’s tax position in optimal condition.