Tax Preparation: 10 Common Mistakes Small Businesses Make
One of the largest challenges small business owners face is preparing their company’s taxes. After all, you’re an expert in your field, not North Carolina tax law; and let’s face it, taxes are complicated. There are potential landmines and pitfalls everywhere. What happens if you improperly classify your staff? Can you lose out on money by improperly calculating your startup costs? Do you know how to maximize your medical reimbursement plan?
Most IRA’s will suggest hiring a professional to maximize your tax savings and ensure 100% financial accuracy.
However, for savvy business owners looking to learn the ropes of small business tax preparation, here are ten common mistakes to look out for.
- Deducting Start-up Costs IncorrectlyNew businesses in their first year of tax preparation are extra susceptible to tax mistakes. Owners commonly overestimate how much of their startup costs are deductible.Despite misconceptions, business owners cannot deduct all startup expenses right off the bat. First, you have to make a sale. Then, those expenses are deducted over the course of the next 15 years.
There is a caveat, however. The IRS will allow up to $10,000 in deductions from startup costs in your first year ($5,000 for startup and $5,000 in organizational costs) if your total expenses did not exceed $50,000. If startup expenditures were more than $50,000, but less than $55,000, you can still receive your deduction, but it will be reduced by the dollar amount exceeded beyond $50,000.
An experienced CPA will sometimes recommend strategically waiting on your startup deduction until the second or third year of your business, depending on your current finances.
- Not Selecting the Proper EntityMany small businesses form as a basic C-corp or LLC, but this can be a mistake! An experienced accountant can help you determine the best business tax entity for your company, based on your desired business structure, number of employees, and financial goals. There are many potential entities to look into, such as:- Sole Proprietorship
– PartnershipChoosing the wrong tax entity for your company can seriously impact your company’s future. For example, forming as a C-corporation doubles the amount of taxes you owe. An LLC can substantially decrease the amount of outside investor funding you can receive. A partnership, meanwhile, offers less personal liability protection. When starting your business, it’s critical to understand the benefits and downfalls of each type of entity–something an experienced Raleigh CPA can help with.
- Mixing Business and Personal ExpendituresMaking this common mistake can be a huge red flag to the IRS. Be careful that you don’t try to deduct expenditures that are not considered business expenses. For example, business dinners and entertainment are not always deductible. The cost of a commute to and from work is also not a write-off. When it comes to business trips, tax law gets dicey. Be careful you’re only deducting true business expenses, and not that fancy dinner or extra night in a hotel room because you extended your stay.On the flip side, don’t forget, for example, that your home office does count as a deduction. You can also deduct auto expenses for business-related travel–different from commuting–but only $0.54 per business mile. You can also deduct auto property taxes, tolls, and interest on the auto loan.An experienced accountant can help differentiate business and personal expenditures — so you don’t make a costly mistake.
- Incorrectly Classifying StaffIncorrectly classifying staff is a pretty easy trap to fall into. Many companies, for example, hire independent contractors in order to save money in tax season. However, if your company’s “independent contractors” are expected to work certain hours or were forced to work on-site, they may actually qualify as regular employees.Ensure you understand the IRS stipulations for independent contractors, or you could end up with severe tax penalties when tax season rolls around again.
- Not Paying on Time or Failing to File on TimeWe understand. Taxes can be daunting, and running your own business is already time-consuming. It can be easy to lose track of time and miss the deadline for your taxes.But you’re not alone — many business owners make this same mistake! An accountant can help clean up the mess and get you back on track with the IRS.
And here’s an important thing to remember: There are two penalties — Failure to File and Failure to Pay. A failure to pay penalty tends to be less costly than a failure to file. So even if you can’t afford to pay your taxes immediately, you should at least file!And if you just need an extension, you can submit a form 4868 for sole proprietors; or form 7004 for all other kinds of business entities.
- Keeping Poor Records and Mistakes on PayrollKeeping clean, organized, and precise records isn’t every business-owner’s strong point–but it is ours! In the middle of a busy day, it can be easy to forget to add that extra receipt of purchase to your files, or update your QuickBooks as much as needed. After all, you’ve got a million other things to worry about!However, there is a big price to pay for this mistake. You need precise, articulate records for the IRS, or else you could lose deductions — lose money! Plus, if your business is ever audited, you’ll want every scrap of paper, folder, file, invoice, and pay stub. There are even digital accounting software tools that can help you manage and organize your records.
- Forgetting Value of Small ItemsDon’t let the IRS take your hard earned money by forgetting to write-off every single possible item that deserves a deduction! For example, small items like petty cash, business magazine subscriptions, or even recipe items for a casserole for a charity dinner are all deductible. Cost of printing marketing collateral and postage stamps can be deductible. Be sure you have a good understanding of every minor thing that can save your business on taxes. They can add up to thousands of dollars before you realize! Save those receipts, and your accountant can help determine what you can use as a money-saving write-off.- Trying to Deduct the Wrong Expenses -Just as we tend to forget the write-off value of small items, we also sometimes overestimate which items we are able to write off. This goes back to “not mixing personal and business expenses.” When running your own business, it’s so easy to let your business and personal blend together. What if you were driving your car to a business luncheon, but swing by Starbucks on the way? Could you calculate which miles are deductive and which aren’t?
This can be a very slippery slope, especially for people new to the world of business taxes and finances. When it doubt, don’t get audited. It’s worth it to ask a professional tax accountant instead.
- Forgetting All Tax ObligationsMany owners are so busy trying to figure out all their deductions, classifying staff, and getting it all in before the IRS deadline, they forget some important tax laws! Are you taking into account your property tax, payroll, local taxes, excise staff, and self-employment taxes?Because a business involves so many elements, other staff members, employee insurance, and varies by your business entity type, it’s more complex than your individual taxes at home.
- Not Realizing Limitations on DeductionsDid you know that, while meal and entertainment costs–strictly for business purposes–can be deductible, only 50% can be deducted? If you try to deduct the full amount, you’ll get a red flag with the IRS.And as said before, you can’t deduct more than $5,000 of startup costs — some businesses assume they can all be written off.
It’s important to realize the wide range of benefits and limitations when preparing for your 2017 tax returns.
You could be leaving money on the table. But you could just as easily be sending up red flags. It’s a fine line. Let our professional accountants help you walk it.
Let C.E. Thorn’s Professional Small Business Tax Accountants Help
For this reason, many business owners–particularly for their first year of filing taxes–request the assistance and wisdom of a professional CPA.
C.E. Thorn, CPA, PLLC has been helping small Raleigh businesses with their tax returns and accounting for 28 years. We’re happy to talk you through it and explain the process, so you’ll have a much better understanding next year.
Call our office at 919-420-0092 or complete the online contact form to get advice now!