We are small business accountants, not CPAs or tax attorneys (though we know some great ones), but when we can help an owner avoid the top mistakes made by small businesses owners, well…we will!
Top 10 Tax Mistakes
- Using the wrong legal entity. Your small business is designated as a sole proprietorship? If so, you are more likely to be audited, have the least allowable deductions, and no legal protection.
- Classifying employees incorrectly. Because employees are about 25-30% more costly, due to income tax withholding, one in three workers is an independent contractor. It’s important that you get the classification right and treat them appropriately from a tax standpoint.
- Not properly deducting startup expenses. Most startups miss one of the most beneficial IRS deductions—the allowable $5,000 to investigate markets, product analysis, etc. and another $5,000 to get a business ready to operate, including consulting fees and travel. That’s $10,000 in deductions in year one!
- Doing your own taxes. You can run your business or read the federal tax code. In 2016, it was 74,608 pages long. Are you really up for that?
- Using the wrong tax professional. Your business is unique; your industry or marketplace is unique. Find and use a tax professional who understands your business. Just because a tax preparer is licensed, you need the right person who can legally minimize your tax expense.
- Mixing personal and business expenses. You’re too busy or don’t know how to correctly distinguish personal expenses from business expenses so you mis-report or under-report, or over-report expenses. They add up over time and are the #1 reason small business owners get audited.
- Failing to plan for taxes. Instead of rushing to finish your taxes weeks or days before the filing deadline, business owners should look at tax consequences throughout the year with the goal of getting a better net effective tax rate.
- Not keeping accurate records. There’s really no excuse in the era of digital tools to not track expenses and receipts, yet many small businesses pile scraps of paper in the shoe box or file cabinet that, at tax time, can be overwhelming even for a professional tax preparer to figure out.
- Not using carryover deductions. Expenses incurred in one year but exceeded the allowable deductions for expenses can be used the following tax year. Unless you maintain accurate records, these deductions may be forgotten. An expensive oversight!
- Not filing on time. Why pay a 5% penalty for every month your return is late? The penalty cap is 25%, but depending on your bottom line, this amount could be substantial.