Fines and penalties for mistakes on your taxes can be staggering. Here are some of the most common small business tax mistakes, and how to avoid them.
Poor Record-Keeping and Organization
Even for businesses that don’t have quarterly filing obligations, taxes should be more than a once-a-year proposition. Leaving it all until the last minute pretty much ensures you’ll miss out on deductions you’re entitled to simply because you haven’t kept track of your spending along the way. Not only that, it could cost you more in accounting fees to get everything straightened out.
Ensure you have a system in place that helps you track income and expenses on an ongoing basis. You should reconcile your cash flow with your bank and credit card statements each month. In addition to helping you prepare your tax return, having a good bookkeeping system in place will help you stay on top of your finances and manage them better.
Mixing Business and Personal Expenses
It’s easy to get things mixed up, especially when you’re self-employed or new in business, but the IRS has very strict rules against the commingling of funds. Only business-related expenses can be deducted from your income for tax purposes, and the only way to ensure that is if the finances are kept entirely separate.
This means you must open a separate business bank account, and you should use a business credit card when making purchases for your company. If you are using any of your personal assets for business, such as your car or a home office, it’s imperative to keep detailed records to be able to support any deductions you take. You can’t deduct what you can’t document!
The two best tips for avoiding tax problems are to stay organized and to be truthful.
Underestimating and Underreporting
If you’re self-employed or filing as a sole LLC owner, you might be required to make quarterly Taxes payments based on your estimated tax bill for the year. The government knows you probably can’t guess the exact amount, but it does want you to get pretty close. If not, you can face a penalty for underestimating and underpaying.
If the IRS believes you were negligent or “unreasonably careless” in reporting your income, or if you substantially understated the amount you owe, it can hit you with a 20% penalty. These “mistakes” are more willful than simple math errors, but you should always strive for accuracy and, of course, be scrupulously honest. If the IRS finds any attempt to intentionally defraud it, the fine can be as high as 75% on the money you owe, plus you might face criminal tax fraud charges.
The two best tips for avoiding tax problems are to stay organized and be truthful. As in life, it’s hard to get in trouble if you do what you’re supposed to do when you’re supposed to do it. And of course, act with honesty, integrity, and with care and good intent.
