It’s almost tax season, and with it comes the myriad of tax forms, instructions, and deadlines that small business owners need to be aware of. Many businesses can get into trouble by not knowing how to file their taxes correctly.
Taxes can be tricky to navigate and tax reporting mistakes can have rather costly consequences. To help entrepreneurs avoid incurring these errors, it pays to know the 5 most common tax mistakes small businesses make.
5 Common Tax Mistakes Small Businesses Make
1. Not Separating Business and Personal Expenses
Regardless of the type of business entity, it is essential for business owners to always keep business and personal expenses separate. For the company, this helps in an easier tracking of cash flow and allows for a more accurate presentation of the actual financial health of the business.
Separating business and personal expenses is also important for tax purposes, as the IRS reminds business owners, only legitimate business-related expenses may be deducted from income tax. It is thus important to not only keep the finances separate, documentation must also be available in case the business is audited.
The best way to keep business and personal finances separate and have documentation is by having separate bank accounts and credit cards for each.
2. Poor Record Keeping and Organization
In order to keep a good record and avoid tax problems, entrepreneurs need to keep their books in order. This can be done by hiring an accountant or using a trusted bookkeeper, such as Cloud Friday, to help manage the business documents and stay organized.
It’s also important that companies make sure that the records are up-to-date before filing any returns or making payments based on them. This is because if these documents are out of date, then they may not accurately reflect what happened during the year and what taxes should be paid out of pocket instead of being withheld from employees’ wages.
Remember, mistakes incurred due to poor record keeping practices could also cost the company to be fined come tax season. As previously stated, the IRS always reminds companies that it is important to keep an organized record of invoices, tax forms, and receipts in case the business is ever audited.
3. Not Realizing Limitations on Deduction
A deduction is an expense that reduces a company’s taxable income and, as a result, the amount of income taxes owed. Companies should be taking advantage of all the right deductions, but be aware of the limitations. The IRS only allows deduction of expenses that are both “ordinary and necessary” for the normal business operations. To understand deductions better, read Publication 535 (2021), Business Expenses.
For an expense to be considered deductible, there may be different factors to consider. Making deductions beyond the allowed amount could cause a red flag for an enterprise. Engaging the help of a reputable tax professional or bookkeeper, such as Cloud Friday, makes tax reporting easier.
4. Underestimating or Underreporting
Underreporting or underpaying taxes puts a business at risk. They could be audited by the IRS, which can result in fines and penalties. If the IRS discovers that a company has been wrongfully reporting income or deductions on a prior year’s return (but not for the current year), it may charge interest on what was owed if no payment was made within 15 days of receiving notice from them.
If an employee engaged in activity that resulted in unreported income from their employer but did not file returns for those years, they may face criminal charges as well—and since these employees often work for small businesses that don’t have adequate staff or resources available to account for tax issues properly through payroll software or other means – this could end up costing many small businesses dearly!
5. Failing To File Or Send The Proper Forms Or Payments On Time
Failing to file or send the proper forms or payments on the deadline can result in penalties. For example, if you owe the IRS a specific amount but don’t pay it by April 15th of the tax year, you’ll be charged interest on that unpaid amount.
To avoid late filing penalties, taxpayers should be aware of all tax requirements for their type of business and the filing deadlines. Or better yet, leave the burden of tax filing and reporting to a qualified tax professional.
Final Thoughts On The 5 Common Tax Mistakes Small Businesses Make
Navigating Business taxes can be difficult and time-consuming, especially for non-tax professionals. It can be tempting to try and figure out the best way to file your taxes yourself—but why take on the burden? It only takes a few minutes for someone who knows how the system works to ensure that you file correctly.
Small businesses can make mistakes when filing their taxes, but these simple mistakes can have huge consequences. The best way to avoid them is by hiring a professional and getting help from experts who understand what you do every day.