For any small business owner, tax compliance can be a huge source of anxiety. You may feel tempted to skip them but doing so would cause some very, serious issues. Don't let the stress of filing your small business taxes have you making mistakes, either. To help, we're going over some of the most common tax compliance mistakes so you can avoid them in this video.
MISCLASSIFYING A HOBBY
To start things off, if you have not yet generated enough income, the IRS may still classify the business you're starting as a "hobby." It's important to understand this because when starting a business you may be counting on certain tax deductions for things like supplies or even home office space.
SEPARATING EXPENSES
When you own a small business you'll need to separate personal and business expenses for the purposes of filing taxes. If you're not meticulous about record keeping, this process can really become difficult. For instance, you'll want to deduct for the mileage from the trip you took to the post office when mailing out packages to customers. Be mindful that the deductible mileage stops when you make a second stop to pick up your groceries. When it comes to these types of expenses, it may become impossible to accurately separate personal and business expenses if you're not tracking them day to day. You should have a separate credit card and bank account for your business. Consistently use the designated account and keep all of your business receipts and records separate. Also, consider paying yourself a salary instead of just drawing from your business earnings as needed.
INSUFFICIENT RECORD KEEPING
Good record keeping includes saving all of your receipts, tracking and categorizing all sales and all expenses, and logging business activities. It may be tempting to simply stash all your receipts in a box or store digital copies in a folder on your computer. If you wait until you're nearing tax time you'll be creating an unnecessary headache for yourself. Worse than that, you will probably find that you're rushed. This is how you can easily miss deductions or make other mistakes that you'll pay for later.
DIY FILING ISSUES
You may want to save money by preparing and filing your small business taxes yourself. There is business tax software to help with the process. But it's important to understand what you're missing by taking that less expensive route. Any competent tax professional or CPA should be able to ensure that you avoid all of these common filing mistakes for your small business taxes. When taking the work into your own hands you're much more likely to miss valuable deductions and perks simply because you're unaware that they exist or apply to your business. Hiring a professional has other major benefits as well. Tax preparation means recording an analyzing income and expenses to some extent. This is the start of the work that's necessary to more effectively run your business.
MISSING APPLICABLE DEDUCTIONS
There are so many ways to miss out on tax deductions for your small business. If you lose receipts or fail to record mileage you won't be able to claim those expenses. You also may not be aware of certain tax benefits that apply to you. Here are some examples of deductible expenses for your small business taxes: office furnishing and supplies, licensing expenses, insurance, and advertising. Other examples are business equipment, interest on your business debts, legal fees, and travel expenses (including meals) It's possible that your business could also be eligible for tax credits, like the business energy credit or tax benefits for job-related education. Keep in mind that carelessly claiming deductions that you're not sure you're eligible for is a good way to attract IRS scrutiny.
These are just a few of the common mistakes to watch out for. For even more info, visit our site to get tons of great information about small business taxes. Or, get in touch for a free tax consultation if you're in a tricky situation with the IRS. And, before you go, if you enjoyed this video, be sure to like, comment, and subscribe!
