Common Mistakes Small Businesses Make On Their Tax Return
Starting your own business is hard work. Besides building your core product or service, you also need to have operational knowledge of numerous other facets of the company. In the early stages of your small business, hiring additional staff or even contractors to manage some of these roles may not be an option. In such a situation, you are faced with the intimidating task of having to learn as much as possible in a short period. As such, it is possible to make mistakes due to a lack of experience and expertise, especially regarding the more technical aspects such as accounting and tax.
Know that everyone makes mistakes, but the idea is to be aware of these errors to ensure they don’t happen on your taxes. So, if you have a small business or are thinking about starting your own business and want to avoid the hassle of tax-time headaches, Dyer and Associates, CPA PLLC, has put together a list of the most common mistakes most small businesses make on their tax return.
1. Choosing the wrong type of tax entity
Choosing the wrong tax entity for your company can seriously impact your company’s future. For example, forming it as a C-corporation can increase the amount of taxes you owe two-fold. On the other hand, An LLC can substantially decrease the amount of external investor funding you can receive. A partnership offers lesser personal liability protection. When starting your small business, it’s important to understand the advantages and limitations of each type of entity, something that only an experienced CPA can help with.
2. Not paying on time or failing to file on time
Taxes can be intimidating, and managing your own business is already hectic. You can quickly lose track of time and miss the deadline for your taxes. Several business owners make this common mistake! An accountant can help get you back on track with the IRS and the State. Also, it is important to remember: There are two types of penalties, Failure to File and Failure to Pay.
A ‘Failure To Pay’ penalty tends to be less expensive than a ‘Failure To File.’ So in case you are unable to pay your taxes immediately, you should at least file your tax returns! And if you are just seeking an extension, you can submit a form 4868 in case you’re a sole proprietor; or form 7004 for all other kinds of business entities.
3. Mixing business and personal expenditures
Most small business owners make this mistake that is a huge red flag to the IRS. Be careful that you do not attempt to deduct expenses that are not considered business expenditures. For example, business dinners and leisure are not always deductible. The expense of a commute to and from work is also not a write-off. Be careful you are only deducting actual business expenses, and not that fancy lunch at your favorite restaurant or that extra night in a hotel room because you extend your stay. On the flip side, please note that your home office does count as a deduction. Sure, you can deduct auto expenses for business-related travel (different from commuting) but only $0.54 per business mile. Expenses such as auto property taxes, tolls, and interest on the auto loan can also be deducted. An experienced CPA can help differentiate business and personal expenditures to ensure you do not make a costly mistake.
4. Keeping poor records and mistakes on payroll
Maintaining clean, organized, and precise records isn’t every business owner’s strong point; but it certainly is ours! It can be easy to miss adding that extra receipt of purchase to your files in your busy schedule. However, there is a heavy price to pay for this mistake. You need accurate, clean records for the IRS, or you could lose deductions and lose money!
5. Incorrectly classifying staff
Incorrectly classifying staff is the most common trap to fall into. Several companies, for example, hire independent contractors to save money. However, if your company’s ‘independent contractors’ are expected to work certain hours or were forced to work on-site, they may qualify as regular employees. Please ensure you are aware of the IRS stipulations for independent contractors, or you could invite severe tax penalties.
6. Forgetting the value of small items
Do not let the IRS grab your hard-earned money by forgetting to write off every possible item that qualifies for a deduction! For example, petty cash, newspaper subscriptions, or even recipe items for a casserole for a charity dinner, all qualify for deductions. The expense of printing marketing collateral and postage stamps also qualifies for deductions. Please make sure you understand every little thing that can save you money on taxes. Save all those receipts, and your CPA can help determine what you can use as a money-saving write-off.
7. Trying to deduct the wrong expenses
Much like we tend to forget the write-off value of minor things, it is also easy to sometimes overestimate which items we can write off. When managing your own business, it’s easy to let your business and personal expenses blend together. This can be problematic, especially for people unacquainted with the world of business taxes and finances. When in doubt, don’t get audited. It’d be wise to ask a professional tax accountant instead.
To avoid these and other mistakes, reach out to Dyer and Associates, CPA PLLC. We are a family-based certified public accounting firm with a team of accountants, tax preparers, and financial advisors in Hernando, MS, providing tax, accounting, bookkeeping, financial consulting, and business advisory services. For over twenty-five years, we have worked with small businesses. In that time, we have cultivated the experience and knowledge base to become a valuable resource to our clients.
We serve clients across Hernando, Olive Branch, Southaven, Horn Lake, Nesbit, Lewisburg, Lake Cormorant, Walls, Senatobia, Independence, Coldwater, Batesville, Oxford, Como, Sardis, Holly Springs, Potts Camp, Tunica, Tunica Resorts, Robinsonville, Clarksdale, Cleveland, Grenada, New Albany, Tupelo, Desoto County, Tate County, Panola County, Lafayette County, Grenada County, Bolivar County, Coahoma County, Tunica County, Lee County, Marshall County in Mississippi, Memphis, Bartlett, Germantown, Lakeland, Millington, Collierville, Covington, Arlington, Shelby County in Tennessee, West Memphis, Marion, Crittenden County in Arkansas, and the surrounding areas.