- Personal Finance
Some Common Tax Mistakes Small Businesses Should Avoid
Nail biting, Short-temper, Hair pulling…Yes, its tax season. It’s hard being a small business owner at this time of the year. Personal taxes are frightening enough, but SMBs usually struggle with complex tax issues.
While it may be easy to start a business, keeping it profitable is not so simple. Even careful accountants and small business owners can get scrambled up in tax codes.
When you are operating a small business, it is crucial to avoid tax mistakes and costly penalties. Tax season is the best time to take necessary action and avoid common tax mistakes.
Here are some practices to help you avoid tax hassle.
Don’t ignore your accountant
Tax season brings with itself a lot of stress because SMB owners have to deal with the entire year’s transactions in a limited timeframe. One of the biggest mistakes they make is ignoring their accountant to prepare taxes, especially if the business requires complex tax return.
Accountants are the experts who have specialist knowledge to assist you through self-assistance process. Hiring an accountant could be an added expense, but if you are not able to file return on time, it is worth the outlay.
Poor reconciliation may lead to financial errors leading to wrong figures. Ignoring accounts is not advisable.
Don’t commingle personal and business funds
Not maintaining separate funds for business and personal expenses, is another mistake committed by small businesses. This mistake also forms the prime target for IRS scrutiny in audits.
Although, not a strict requirement, but is advised by tax professionals, since it ensures accurate bookkeeping as well as reporting. In mingled account, business expenses can be missed and might end-up unreported.
Make it a habit to keep the expenses separate from the beginning to keep monies apart.
File and pay Uncle Sam on time
Late filing only gets you further behind. If your business fails to pay taxes or file late, IRS can penalize an additional 5% per month on due balance, on top of other penalties – such as the ones imposed for fraud and filing inaccurate return.
Forget to file and you will have to pay for this mistake. Don’t let your inability to what’s due, delay the filing. In case you are too busy to file by the deadline, ask for filing extension.
Keep proper records – It’s all about being organized
Record keeping is an important aspect of running a small business. Tax season can go well if your accounting records are up-to-date. It not only helps business owners properly deduct expenses related to business, but also track and manage employee payrolls and inventory.
There has to be thorough and exact records so that you can easily prepare returns. You need to prove entitlement to deductions done if you are audited, else you may lose deductions.
Expenses must be created when they are incurred and not after two years!
Don’t forget carry-overs
There are some unused deductions and tax credits that may be carried over to next year if they exceed certain thresholds. Some examples include charitable donations, deductions, business write-offs and capital losses. You can carry forward the unused amounts for next year, so check if you have any such deductions waiting to be dusted off. Amending your previous year returns might provide you better refunds for all those years.
Finally, remember Alternative Minimum Tax (AMT). If you have paid it in the previous year, you may get the credit this year.
Don’t ignore self-employment tax laws
Along with income taxes, everyone must pay Medicare taxes and Social Security. If you are self-employed you will have to pay these taxes yourself, since you don’t have any employer to do it for you.
Self-employment taxes are often ignored by small businesses. Usually, you pay this tax if you net more than $400 from your business. Paying this quarterly, would help you avoid tax penalties at the end of year tax filing.
If you ignore this tax, penalties and interest can add up pretty fast.
Wrapping it up
Unless you are an accountant, the financial obligations to run a small business can take a lot out of you. By making yourself aware of common tax mistakes, it can be easy to handle any complex tax situation. Give taxes all the attention they deserve, so you don’t have to pay anything more than required..