5 Common Small Business Tax Mistakes That Could Cost You a Fortune

With the many responsibilities that come with running a business, it’s not surprising that business taxes aren’t at the top of the list of items to focus on for many small-business owners.

Not paying attention to this important part of your business can result in nasty, and often costly, surprises however.

Here, I have listed five of the most common small business tax preparation mistakes so, you can avoid making the same errors.

1. Mixing Business and Personal Finances

One of the biggest mistakes that small business owners make is what is called “comingling” of accounts. While having separate bank and credit accounts is not strictly required, it is advised by most tax professionals because it not only makes tax time much easier but it also ensures much more accurate bookkeeping overall, as well as financial reporting.

Also, business and personal finances should be separated because, in the event of an audit, the burden of proof is on you to prove your business expenses and income.

2. Overstating business expenses, or missing out on valid deductions

 Whether it’s for business travel, meals and entertainment, printing supplies, or other usually legitimate deductions, the IRS computers are good at looking at what similar small businesses in an industry type spend on similar expenses.

The three most reviewed items are:

• Home office deductions
• Car expenses
• Travel and entertainment expenses

In addition to having data on average spending patterns, the IRS also requires proof that the expense was really a legitimate business expense, and there are limits to how much you can claim for certain items.

While claiming too many expenses can raise a flag with the IRS, missing out on tax deductions you’re entitled to only punishes you and your business. Some of the deductions that small businesses often miss out on include: startup costs, continuing education, interest on personal loans and credit cards if you can verify they are used for business purposes.

3. Filing Late or Not Filing at All

 If the deadline is missed, or you’re waiting for that one deal to close, it’s better to file late than not at all. Any penalties you accrue by filing late, or failing to file at all, will continue to compound until you resolve the issue.

The IRS advises that you should, “File all tax returns that are due, regardless of whether or not you can pay in full.” If you are unable to pay the full amount, installment plans are available.

4. Working With the Wrong “Expert”

 Don’t use anyone who suggests that you hide income, or take write-offs you know you aren’t entitled to — this is warning that the preparer is shady. If the IRS catches the preparer, ALL of the preparer’s clients may come under audit. This what happened to one of my client and it cost her time, money and a lot of headaches. And, by not using a good preparer, you may miss out on write-offs you are rightfully entitled to.

Then there’s the fact that the IRS holds the business owner responsible for tax errors, regardless of who completed the filing. To help evaluate tax experts, try these tips for choosing a qualified professional to prepare your taxes.

5. Not Keeping Records Up to Date

This is the most common and the biggest tax mistake small business owners make. If business owners do not have a proper record keeping process in place they run several risks:

• Increasing the amount of time it takes to file taxes
• Missing important write-offs that will yield you a greater return
• Losing the right to deductions because it is impossible to prove that the business qualifies for them
• Providing the IRS with inaccurate information

The worst case scenario here will result in an audit. While audits are never a fun process, getting audited when a business has messy or missing documentation can become a nightmare!

Tax time will go smoothly if you keep your annual accounting up-to-date, and it also helps you monitor the progress of your business.

Don’t allow your financial records to fall into chaos. If you have to, hire an outside accountant to take care of your books.

Whether you do your business taxes yourself, or rely on your accountant, it is important to get started as early as possible.

Getting organized and having peace of mind with your taxes done IS POSSIBLE!

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Note: The information provided here is for general education only, and not intended to be tax advice. Always check current available IRS materials, and with your own tax advisor.