Tax season can wreak havoc on unprepared businesses. Some business owners fail to save enough money for their taxes. These small business owners must make difficult decisions on how to pay their taxes.
The tax season’s nuances overwhelm many small business owners. Rules change each year across federal, state, and local taxes. It’s hard for business owners to keep up with changes and tax payments.
No one can run away from taxes. However, we can prepare for the upcoming tax season. Preparation leaves us empowered and turns us into action takers.
This tax tips small business guide will help you make payments and avoid mistakes. Let’s get started.
1. Misrepresenting Income
Small business owners receive many 1099 forms. Each form shows a company’s revenue from an income source. You must document and assemble these forms for the tax season.
Mistakes arise when you misplace 1099s in your tax returns. You also receive 1099 forms for activity in your investment and retirement accounts. These forms go in different parts of your tax return.
Listing your income in the wrong places can lead to scrutiny from the IRS. Keeping your forms organized will make this scenario less likely.
2. Under or Over Reporting Income
When filing small business taxes, make sure you accurately report income. An inaccurate number will hurt you either way.
If you underreport income, the IRS will investigate. You can get hit with costly fines for underreporting.
Over-reporting does not land you in trouble. However, overreporting income increases your taxes. You may end up overpaying for taxes.
You may get a tax refund for over-reporting income. While this sounds good, it may take over a year to receive the refund.
You could have used that money for a business investment or emergency expense. Alas, that money will become unavailable for quite some time. Opportunity costs suggest you could have done something more useful with the money.
3. No Tax Preparation
Are you prepared for the upcoming tax season? Most small businesses remain unprepared for tax payments.
No one enjoys paying small business taxes. Not only do you pay taxes, but you also need to find your paperwork.
The prep work requires sifting through numerous documents. It gets tedious in a hurry.
Many small business owners don’t prepare for taxes until the last minute. People can make mistakes when compiling tax forms and documents under a tight window.
Some mistakes lock you out of funds, while others mistakes can trigger a small business audit. Adequate tax preparation helps you avoid most of the negative scenarios.
Don’t wait until a few weeks before tax season. Assemble forms and documents each month. Organizing your tax work each month will reduce the total work required at the 11th hour.
4. Mixing Personal and Small Business Taxes
Many business owners view their small business as an essential part of their lives. Small business owners put many hours and plenty of cash into their businesses. The lines between personal and work can get blurry.
It would help if you kept your business taxes separate from your personal taxes. Do not mix the two together.
You can only separate the two entities if your company is a corporation. Make sure your company gets registered before the next tax season. Corporations pay taxes using Form 1120.
You can further establish this separation with a company credit card. Use this credit card for company expenses. Use your personal credit card for other expenses.
5. Not Using the Home Office Deductible
When you look at your home, do you think of it as a tax write-off? Many small business owners use their homes to cut their tax bills.
The home office deductible turns part of your home into a tax write-off. It would be best if you viewed tax rules before getting this deduction. However, people exaggerate the risk of an IRS tax audit.
Many small business owners fear getting audited because of a home office deductible. The issue is not as prevalent as many business owners believe.
Take every deductible you can get. Each one keeps more money in your pocket. Missing out on this deductible remains one of the most common tax mistakes.
6. Not Recording Your Miles
Do you drive often? You might qualify for another deductible?
You can write off every mile you drive for business purposes. If you go to a conference or your office building, you can write off the miles.
Businesses can get creative with their mileage tax deduction. However, you need to prove you drove for your business.
Record your vehicle mileage when using it for business purposes. Each mile saves you money, but only if you show your work.
You can claim deductions on personal mileage. However, you’ll save more money with business mileage than personal mileage.
7. Not Contributing to Your Retirement Plan
Investing for retirement is an essential step towards financial independence. Many people achieve this goal by contributing to their retirement plans.
This approach lets you build your nest egg. You can tap into those funds if you close your small business or hand off the baton.
Contributing to this plan also helps with taxes. You can contribute pre-tax income to your retirement plan. Pre-tax contributions to your retirement plan will lower your taxable income.
A lower taxable income results in a lower tax bill. A lower tax bill and more money for retirement? Sign me up!
8. Filing Taxes Late
Tax season presents many headaches. If you wait too long to prepare, you might file taxes late.
Filing taxes late will trigger a penalty payment. These fees rack up for every month you delay your tax payment.
Remain attentive to upcoming tax deadlines to avoid this issue. Mark tax payment dates in your calendar, so you do not miss them.
Sometimes, you will doubt your ability to pay taxes on time. In this case, you can ask for a filing extension to get extra time.
Only use this option as a last resort. You should not rely on filing extensions to get out of penalty payments.
Due to the complicated nature of small business taxes, many ask for at least one extension each year.
Asking for many extensions will make you too comfortable teetering near the deadline. This bad habit can lead to extra costs. File before the deadline to avoid these issues.
9. Not Staying up to Date on Taxes
Tax rules change across the federal, state, and local levels each year. Failing to stay up to date can result in higher tax bills and missed deductibles.
Briefly check the latest tax news once a month. This habit will keep you informed on developing changes to tax season. The rules you used last year may become drastically different the following year.
You can also hire a tax professional to stay up to date. Tax professions will stay updated on the latest tax news. They can assist with preparing your tax returns.
10. Letting Taxes Guide Business Decisions
Some businesses rush to buy assets they do not need. Other small business owners sell investments at a loss to lower their tax bills.
Some of these purchasing and selling decisions make sense. However, it would help if you did not let taxes guide business decisions. You might buy something you don’t need or sell something you should have kept.
11. Losing Track of an Asset’s Cost Basis
When selling assets, you must show a loss to receive a deductible. Tax professions and the IRS will not take you at your word. They will want to see your cost basis.
Cost basis shows the amount you paid to purchase an asset. You cannot take a tax deduction on the transaction without a cost basis.
If you buy an asset for $20,000 and sell it for $15,000, you lose $5,000 on that investment. This transaction qualifies as a deductible.
However, if you cannot prove you bought the asset at $20,000, you cannot use the transaction as a deductible. Even worse, the IRS will assume the $15,000 is all profit. Not only do you lose the deductible, but you also get taxed on your ‘profit.’
When you purchase an asset, keep a document of the cost basis. You should look for documentation to validate the cost bases for all of your company’s assets.
Look for cost basis documents now instead of right before the tax deadline.
12. Falling Behind on Tax Payments
Filing taxes late presents enough challenges. Falling behind on tax payments yields worse consequences.
Some small business owners fall behind due to insufficient funds. The best solution is to create a separate account to store money for tax payments. Put a percentage of your revenue into this account each month.
Do you have some unfiled tax returns? Look here to see how you can navigate your way through back taxes.
13. Getting Sneaky with Employee Payments
Some small business owners pay their employees under the table. However, the IRS provides clear definitions for employees and independent contractors.
If the IRS finds you mislabeling workers, they can take your business deductions. Review the tax agency’s definition of “employee” and “independent contractor.”
14. Missing Out on Business Deductions
Small business owners can take advantage of many business deductions. However, not every small business owner is privy to their available deductions.
Organize your expenses and ask a professional for tax help. A tax professional can let you know which expenses qualify as deductions.
A tax professional can review previous tax returns to find deductibles you missed. You can apply some missed deductibles from a prior year into this year.
15. Not Asking for a Tax Professional’s Help
Some small business owners feel like they can do everything. They wear many hats to ensure their business runs smoothly. Some of these business owners decide they can file taxes on their own.
Asking for a tax professional’s help will save money. You will discover additional deductions and gain peace of mind. You will also gain considerable time.
The IRS states that the average tax preparation process takes 13 hours to complete. Small businesses usually stretch beyond 13 hours. They have more complicated tax returns than individuals.
You will spend extra time grouping documents and filing taxes without a professional.
A tax professional gives you extra time to stay in your business. It doesn’t make sense for every business owner to prepare and file taxes. They can delegate those responsibilities to focus on higher-paying activities.
16. Not Keeping a Copy of Your Tax Returns
Let’s say the IRS audits your small business from a tax return you filed two years ago. Do you have a copy of the return to verify the tax agency’s findings?
Keeping a copy of your tax returns can come in handy. However, most small business owners forget this important detail.
The IRS can legally audit tax returns for up to three years since you submit them. Keep a copy of your return to fulfill that 3-year timeline.
You can also review previous tax returns to see which deductibles you used. These insights will better prepare you for the next tax season.
Summarizing the Tax Tips Small Business Guide
Tax season gets easier with preparation and practice. You may never enjoy the tax season, but it can become more manageable.
This tax tips small business guide will help you avoid costly mistakes when filing taxes. Making fewer mistakes decrease the likelihood of a small business audit.
If you want to learn more tax tips, browse this blog’s content. You will find numerous insights to assist with your tax-related questions.