Though these filing mistakes might seem like decisions that are completely out of character for you or your staff, the tax filing process grows more complicated as your business expands.
There are several common mistakes businesses make on their taxes, which can be avoided if you and your staff take note of the rules and ensure you are up to date with any IRS changes.
1. Inaccurate ReportingIt doesn’t matter whether your reporting error is accidental or intentional, misreporting your income to the IRS (both personally and as a business owner) leads to scrutiny. Virtual currency must be reported as well as any investment income and non-employee compensation.
The IRS uses its computers and 1099 forms to match what has been reported to them with what has been reported to you as a business owner, so it is essential that you pick up the information correctly. Income may be reported to you on information returns, such as the 1099-MISC form showing nonemployee compensation if you are an independent contractor, or the 1099-K form showing credit card and certain other transactions, regardless of your entity type if you have a certain amount of transactions.
If the forms are wrong and you can’t get the sender to correct them, report the wrong amount with a proper adjustment and attach an explanation to your return so you are only taxed on the correct amount.
2. Meal Expense DeductionsIt’s a minor thing, but trying to claim 100 percent of meal expenses when working with clients is a problem. Client entertainment allowances have changed, and continually attempting to skirt this truth could prompt IRS involvement. Only 50 percent of certain business meals are deductible. Although treating a client to a meal to win them over or paying for your own meals on a business trip is a legitimate business expense, you can only deduct half of the cost.
3. Tax Preparation ProcrastinationOne way to make tax preparation much easier is to make sure your records are well kept. Actively documenting expenses and deductions requires a proper recordkeeping process. You must be proactive! It is recommended to use a digital accounting tool to help you and your staff keep track. The tool should be able to auto-fill expenses from uploaded images and store data in the cloud may be very helpful.
When you have access to a tax consultant, you shouldn’t wait until tax season to figure out what to do about filing and record keeping. By working on tax planning with expert help and making sure records are kept and paperwork processed throughout the year, it can avoid some of the tiny mistakes that could cause an audit. It can also help prevent a shockingly high tax bill that you aren’t prepared for. If you miss the tax filing deadline, your business will be assessed a 5 percent per month penalty by the IRS that will continue to increase until the return is filed.
4. Ignoring Mileage RecordsThe tax laws allow for business owners to claim mileage when using a personal vehicle for business purposes. However, this deduction must be supported by accurate records.
5. Lowballing Estimated TaxesMany business owners postpone or dread the quarterly payments of large checks to the IRS. These large payments cut into a business’s cash flow and may not be properly planned at the outset when budgeting. But lowballing estimated taxes can lead to paying penalties (20 percent) if you pay less than what you owe or pay late. It’s best to accurately assess your estimated taxes for the year and pay each quarter on time.
6. Use the Wrong Retirement PlanSmall business owners can use their retirement plan contributions to reduce their tax liabilities. However, choosing the wrong plan could actually limit the deductions you can take or require you to pay for employee contributions that your company can’t really afford.
Professional help with your small business development and tax preparation can also help you avoid making some of these costly mistakes. To find out what other tax issues could cost your business money, consider speaking to a tax consultant.