Tuesday, March 28, 2017

Small Business Tax Preparation: 7 Tax Mistakes to Avoid

Tax challenges are common among small business owners and it’s more than likely that one of your biggest pain points is filing your taxes. While it may only occur once per year, it requires substantial preparation.

At this point you may be asking yourself simple questions like “Should I do them myself?”, “What will cause the IRS to audit my small business?” or even “how can I save money filing my small business taxes?”

These are all questions the kind folks at Rocket Lawyer can answer for you, so whether you’re outsourcing your small business taxes or conquering them yourself everything goes according to plan.

Mistake #1: Keeping Poor Records

Disorganized bookkeeping can cause quite the headache when it comes to filing your small business taxes. Keep your records organized so you can properly deduct business-related expenses, manage inventory, prepare accurate financial statements for the IRS, maintain employee payrolls and most important limit the potential for costly legal issues. If you’re old-school and still find efficiency in color coding folders in filing cabinets, make sure you’re documenting everything by month and year. If you prefer digital, Quickbooks is highly regarding as the most effective accounting software for Small Business Owners. Pick your poison and stay organized.

Mistake #2: Failing To Pay Your Small Business Taxes On Time

This is a big no-no. We all make mistakes, but this one will get you in deep trouble with Uncle Sam. Mistake #1 usually leads directly to this. The first and most important way to stay on top of small business tax filing is determining the correct IRS tax form and the due date that coincides. For example, if you run your business through a sole proprietorship you’ll need to use a 1040C Form which is due on April 15th. Forgetting to file will result in a 5% monthly charge for up to the first five months following the returns due date. Charges can spike up to 25%. If you completely miss the boat and forget to pay your taxes flat-out, the IRS is going to charge 6% interest a year on unpaid taxes, in addition to those late payment penalties.

Mistake #3: Improperly Deducting Startup Costs

The expenses your business incurs before your first sale are considered startup costs (purchasing equipment, leasing office space, buying computers and printers). These types of expenses can’t be deducted until the first sale and will then be deducted over 15 years. If you’re startup costs do not exceed $50,000 the IRS allows you to elect to deduct the first $5,000 for startup costs (mentioned above) and another $5,000 in organizational expenses (setting up your business as a sole proprietorship. If you’re startup costs exceed $50,000 you’re out of luck.

Mistake #4: Dipping Into Your Employee Withholding

As a small business owner, there are times you may be short on cash. During those times you may be tempted to dip into your employee withholding and social security. While the company may be yours (if you’re the founder) in some regard, that money actually isn’t. Borrowing from withholding or social security can provide potential penalties for you and your business during tax season.

Mistake #5: Classifying Employees as Independent Contractors

Small business tax preparation is about being honest and truthful especially a new entrepreneur. Classifying your employees as independent contractors when they’re really not can hurt you. The IRS will assess your employees based on a few common law rules: behavioral, financial and type of relationship. Learn more about how to properly determine employee vs independent contractor from the IRS.

Mistake #6: Forgetting to claim the home office deduction

We’re in the digital age which allows a lot of entrepreneurs to kickstart their company from home to save on startup costs. 52% of all businesses in the US are run from home. If you run your business out of our home remember you can take a deduction for it. The IRS provides all the details you need on how to proceed with a home office deduction.

Mistake #7: Mixing Business and Pleasure

An easily avoidable mistake that can create quite the hang-up for new entrepreneurs preparing for small business tax season. It may be more convenient for you to bucket personal expenses and business expenses together, but when tax season comes around you’ll be wishing you didn’t. Here’s why: it’s going to be a big red flag for the IRS which is a set of eyes you don’t want over your shoulder. Keep your personal expenses like groceries, pet expenses, dining, entertainment and travel separate. Having different bank accounts for personal and business is a sure-fire way to ensure they aren’t mixed.

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