As a small business owner, it is your responsibility to provide the government with accurate tax returns. If you don’t, they will come after you with a larger bill, plus interest.
There are many mistakes that are easily made and can often be overlooked, however, in order to avoid them you’ll need to know what they are. Here’s a closer look at four common tax mistakes and how you can stay away from them on your small business tax return:
Not Hiring an Accountant
Even if you have a small business with just yourself working in it, having an accountant is one of the best ways to protect yourself, ensuring that you get the most accurate tax returns year after year. Many people simply grab a piece of tax software and hope for the best. Yet, every business is very different and you are likely missing large deductions you could be taking. Also, it is always best to leave a professional to do professional work.
An accountant will not only be able to help you with your annual tax returns, but they will also help you to manage your quarterly tax returns, sales taxes required and your franchise taxes. In addition, an accountant will be able to provide you with certified financials in the event that you decide to seek capital financing.
Most finance opportunities will request audited financials, and having an accountant that is familiar with your business situation and who already has the necessary documents will make the whole process quicker and simpler.
Not Tracking Your Business Expenses
Officially, the IRS doesn’t require that you have receipts for anything that’s under $75. If you don’t have a receipt, you’ll still need to have some sort of proof that you’ve spent this money, including the time, date and amount. If you can’t hold onto a receipt for some reason, be sure you have a calendar that keeps track of all of your activities that includes where you went and how much you spent. This includes lunches with clients! Most of the time, it’s easier to simply keep the receipt.
In addition to receipts for each purchase, make sure that you use accounting software when possible. This will allow for not only allow you to keep better track of your business, but it will make it easier to prepare your end of the year accounting.
Also, choose business credit cards that provide an annual summary statement. You probably have more expenses that can be claimed as business expenses on your taxes that you aren’t keeping track of. Do you use a credit card or cash to pay for things during business hours? A good way to avoid this mistake is to have a business credit card used solely for business that allows you to make all purchases for your business and gives you a convenient transaction record to keep track of them. Give one linked card to each of your employees who you pay expenses for, too.
This will also help you when you are preparing your business tax returns as these annual statements work for an easy reference point to compare against receipts and for the items that you don’t have receipts for.
Not Understanding Automobile Deductions
Auto deductions are complicated, and with good reason, so you’ll need to go through the process carefully. You can select from a standard mileage deduction or you can go with the actual mileage deduction. If you go with the standard mileage deduction, you can’t claim the depreciation of the actual expenses.
If your business owners the vehicle, you can get 100% of the costs deducted, but if it is used for any personal needs, you’ll need to include this as taxable income for that employee. Also, with your automobile, be sure to evaluate the benefits of a lease versus a purchase option as there are advantages and disadvantages for each.
Not Writing Off Equipment Correctly
Equipment is an important part of your business. Do you know how to file your taxes on it? Since the equipment is a capital expenditure, you must depreciate it. There are some rules in place here that allow you to write off $24,000 in capital expenditures for tangible personal property, like your computers, the first year you purchase them. These still need to be reported, though.
Fewer Mistakes = Higher Profits
What happens when you don’t follow the very specific rules the IRS requires? You’ll find yourself heavily taxed, or to be found in violation of the IRS rules, possibly facing face legal proceedings unless you can make amends in time to avoid it. As a busy entrepreneur it’s difficult to keep track of all the ins and outs of the tax code. That’s why the most important rule when managing your small business taxes is to hire a good accountant to keep you up to date and on track.
Tags: automobile deductions, business taxes, hiring accountant, tax mistakes, Taxes, tracking business expenses