Are You Making These Small Business Tax Return Mistakes?

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.

Corporate Tax Deadline Today

My accountant dropped off my tax returns yesterday evening since calendar-year S corporations like mine need to have their 2007 federal income tax returns filed by today.   

If your tax return isn’t ready yet just mail in IRS Form 7004 to apply for a 6-month filing extension. I’m cutting it close, down to the last minute; but as long as it’s postmarked 3/17 I should be fine.

If you have a calendar-year C corporation, the same deadline applies.

Protect Your Small Business Tax Data from Theft

Hiring an accountant to prepare your business taxes is a wise move for small business owners.  Having a certified public accountant review and report on your finances is a great way to leverage the training and experience of an expert to help optimize your finances.

I’ve found that working with your accountant is like most other business projects, it’s an iterative process.  You give them your 1099’s, profit & loss statements, and other financial documents; they look them over and come back with questions and requests for more information.

The cool thing about modern technology is that you don’t actually have to meet with your accountant each time they need more information or to discuss something further.  Of course, since you’re sending sensitive financial information you don’t want to just email your documents to your accountant.  You need to find a secure way to protect your tax data from theft.

My first attempt at securing additional tax forms was to zip them up with WinZip and encrypt the files with a password.  This wasn’t the best solution for two reasons.  Anyone that was persistent enough could run a password cracking program on the zip file if they intercepted the tax data.  The second reason I’d advise against this is that my accountant was unable to open the zip file due to how his version of Winzip handled the security.

I was pleased to discover a service called Send This File that allows you to send data in a secure fashion and has a wide range of plans for businesses of various sizes.  We used Send This File to exchange documents securely and never had to meet in person throughout the process.