The Most Common Mistakes Small Businesses Make Filing Taxes
Although filing taxes may not be a fun activity for a majority of the small business owners, it is without a doubt, a crucial process to enforce a strong business foundation. Unfortunately, the necessity of filing taxes is often confused and aligned only when the April 15 deadline draws nearer.
That said, there are more than just a handful of considerations small businesses should take into account before jumping down the rabbit hole of filing taxes. It is completely normal for small business owners to focus on the profitability and acquisition of sales, but the intended or unintended avoidance of tax season may result in hefty penalties and extraneous problems.
The slightest misconception and putting the wrong information in multiple columns may trigger an audit from the IRS. To ease your mind, here’s a simplified look at some of the most common mistakes you should avoid as a small business while filing your annual taxes.
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Filing Taxes after Deadline
Failure to miss the year-end tax deadline would cost your small business an assessed monthly penalty of 5% by the IRS. The nature of the penalty is not definite. That means the ratio and percentage could increase with the passage of time. However, the complete neglect to pay taxes will ultimately cause a monthly penalty plus 6% interest.
It should be evident for small businesses to file taxes on time. Remember, as deadline compliances are not met, the more penalties you will have to endure at the hands of the IRS. Apply the same rules when it comes to choosing the right forms to fill and file. You can figure out the complexity of your tax filing forms on your own or acquire the services of a professional tax specialist for much-needed guidance.
Overreporting or Underreporting Income
If you collect sales taxes from selling single or multiple products in the market, make sure that you don’t report sales tax in your tax report during tax filing. In simple terms, you just have to minus the sales tax from the total sales before reporting the income to the IRS authorities.
Incorrect Estimation of Payable Taxes
Whether you are filing taxes as a sole proprietor, shared partner, or S corporation; the IRS requires you to make a correct estimation of your tax payments so long as you expect to owe more than $1,000 upon filing your tax returns. Similarly, as a self-employed individual, you would still be liable to pay the tax amount payable to the IRS.
Small businesses that enjoy limited liability company (LLC) status are specifically required to make tax payments that are expected to exceed more than $500. With the help of Form 1040-ES, you can calculate the exact amount of tax payments.
Conversely, you do have the freedom to get help from an accountant or you can even hire a bookkeeper to get the right estimates for tax payments before final submission.
Not Making the Right Business Deductions at the Right Time
Business deductions serve the purpose for small businesses when they don’t want to pay more taxes owed to the IRS. Now, it may sound basic to calculate the relative amount. But selecting which deductions should make the cut at right time can be an exhausting affair for small businesses.
The ordeal of filing taxes for small business gets particularly chaotic when they have to specifically calculate and decide the criteria for each possible deduction. Your small business, for instance, can qualify for a number of deductions such as office furniture, initial expenses, used equipment, available licenses, and incurred advertising costs. The trick is to thoroughly analyze the stated deductions set forth by the IRS and compare the deductions that you can cut back.
Forgetting Home Office Deduction
Home office deduction claim, for example, is one of the most common deductions a large chunk of small businesses in the U.S. fail to understand. So long as your business operations are conducted within the same home vicinity, you can claim the deduction. Contrary to preconceived misconception, auditors don’t hold this deduction as a cause for audit. Small businesses have two options to write off home office expenses after meeting the IRS requirements.
Non-Existent Tracking and Visibility of Expenses
The non-availability of a thorough expense record makes it harder to make tax deductions as they may be hard to track down and even harder to verify. Keeping clear and detailed business records such as receipts and trail of travel will help you categorize your total expenses.
Small businesses can start a collaborative effort with a tax professional to invariably track expenses and get the support they need throughout the year. A tax professional, on the other hand, can also help you reorganize the entire tax process for efficient and cost-effective tax filing.
Failure to Distinguish between Business and Personal Expenses
Unlike C corporations, small businesses have to tread the tax waters carefully and not drift away. The fact remains that failure to separate business and personal expenses can make or break your business. A great way to avoid confusion is to create different checking bank accounts and credit cards. This allows you to separate the receipts and as well as averts the possibility of cashing out your salary from the business account.
Hiring an Inexperienced Tax Consultant
Small businesses frequently indulge in non-expensive methods and end up damaging the integrity and image of the business. However, the individuals who are running small businesses as sole-proprietors may not be susceptible to such risks. Also, small businesses solely end up focusing on avoiding tax filing mistake and inevitably getting distraught after finding out what deductions they could have made.
For the sake of uninterrupted business operations, a tax professional can advise you on tax planning, efficient separation of business and personal expenses, getting necessary references, making valuable considerations, and foreseeable tax mistakes. The truth is that a tax specialist can help you carry most of your tax burden and make tax filing simpler.