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There are several critical tax mistakes that small business owners commonly make that could result in an audit and large fines.
Taking on the task of running a small business can be overwhelming, and having to deal with small business taxes doesn’t make things any easier. There’s a lot to know about how small business taxes work—how to claim employees, what is deductible, and many other things. This is a lot of information to deal with, especially as you’re learning how to keep a business running, so mistakes are a very common problem. Be careful to avoid these common mistakes as you file your small business taxes.
Failing to File or Pay on Time
Running a small business is a lot of work, and it’s not unusual for time to slip away from you. Unfortunately, when it comes to handling taxes for your small business, you need to make sure that they are filed and paid on time. If you are late on either of these tasks, you will be forced to pay a penalty. Mark your calendar! If you require an extension, a sole proprietorship can file form 4868, while all other business types can file form 7004.
Claiming Non-Deductible Expenditures
Knowing what is and is not deductible can be incredibly confusing, especially as laws change and adjust over the years. For example, company dinners are not always deductible, and travel expenses will also be subject to scrutiny. Claiming non-deductible expenditures on your small business taxes will likely to an audit by the IRS and could cause problems for your business. It’s never a bad idea to hire a CPA to help you navigate these tricky laws and regulations so you can rest assured that your taxes will be filed correctly.
Incorrectly Identifying Staff
If you hire independent contractors or part-time employees, you need to know how the laws work and how these staff members remain classified within these roles. Working employees for various times and hours can actually change their official legal status as an employee, potentially causing you to misidentify them on your business taxes. Know the laws so you can file appropriately and avoid an audit.
Incorrectly Deducting Startup Costs
Startup costs for a business are deductible, but not all of them are. It’s a very common mistake for new small business owners to overestimate how much of these costs can be deducted, and that can cause a big problem very early on in the startup process. Be sure to do research on startup cost deductions or have a CPA help you file those taxes to ensure that they’re done correctly. You can even speak to a CPA before you get started so you know how much you’ll be able to deduct, allowing you to plan your startup costs accordingly.
Choosing the Wrong Business Type
There are 3 types of small business entities: sole proprietorship, partnership, and limited liability company (LLC). These different structures are taxed differently, and you will need to know how your business will be affected before you choose which option fits you best. If you’re not careful, you may fall victim to choosing a business structure that you’re unable to sustain due to the way it is taxed.
Underestimating the Value of Small Deductions
Don’t forget about all of the little deductions you can make as a small business. There are a lot of small items that can be deducted from your small business taxes, and it’s important to know what those are. Many things directly related to your business or charity items can be deducted. However, do remember to be careful about what you are deducting and be sure it is truly deductible. As always, hire a CPA if you need extra help to ensure that you’re getting as many deductions as possible without claiming non-deductible expenditures.
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