Common Small Business Tax Mistakes

Staying on top of taxes is crucial for any small business owner. However, with complex tax codes and frequent filing deadlines, mistakes can happen easily.

Even minor errors can result in penalties, increased tax bills, or audits down the road. To maintain tax compliance and avoid problems with the IRS, proactively addressing potential pitfalls is essential.

This article covers five of the most common small business tax mistakes:

1. Inaccurate recordkeeping
2. Misunderstanding deductions and credits
3. Missing deadlines and filing errors
4. Mixing personal and business finances
5. Not seeking professional help

Read on to learn what causes these errors, how to fix them, and best practices to implement for smooth tax filing now and in the future. Getting taxes right from day one will save you significant time, money, and headaches as your business grows.

Mistake #1: Inaccurate Record keeping

Maintaining organized and thorough financial records is the foundation of proper tax preparation and reporting. However, many small business owners struggle to keep their books updated, often unintentionally omitting important details. Without accurate documentation, you run the risk of:

• Missing out on eligible deductions – resulting in a higher tax bill
• Trigging audits due to discrepancies between reported figures and actual financial documents
• Facing penalties for late filings if records are delayed or unusable

To establish diligent recordkeeping habits:

• Use small business accounting software like QuickBooks or Xero to automatically track income, expenses, account balances, and more in one centralized system
• Log every expense when it occurs, carefully noting date, amount, category and business purpose
• Scan or photograph corresponding receipts and upload to your accounting software for easy reference
• Take advantage of mobile apps to capture receipts and track mileage while on the go
• Back up digital records regularly using secure cloud-based services

Setting aside time weekly or monthly to review financial reports will help you spot any missing figures or miscategorized transactions early on. This attention to detail and organization will provide peace of mind at tax time.

Mistake #2: Misunderstanding Deductions and Credits

The intricate rules around tax deductions and credits available to small business take time to wrap your head around. However, lacking clarity can easily lead to mistakes leaving money on the table. Common errors include:

• Claiming personal expenses as business deductions
• Failing to claim newly eligible deductions in recent tax legislation
• Not understanding which credits have changed, been removed, or added back

While the IRS provides resources to explain deductions, the specifics can still trip business owners up. Connecting with a knowledgeable tax professional is key for gaining a nuanced understanding customized to your particular business structure and industry.

For example, companies with employees may qualify for the Credit for Small Employer Pension Plan Startup Costs or the Credit for Employer-Provided Childcare Facilities and Services. Complex industries like manufacturing or engineering can benefit from the Research and Development Tax Credit. As regulations evolve year-to-year, continuing education ensures you maximize available offerings.

Mistake #3: Missing Deadlines and Filing Errors

Late filing is one of the easiest missteps business owners make when taxes get pushed aside in favor of everyday operations. However, no matter how busy things get, you must remember:

• Federal income tax returns for S-corporations and partnerships are due March 15
• Federal income tax return for sole proprietors is due April 15
• Request extensions well ahead when more time is needed

Additionally, entering incorrect information by accident, failing to include required supplementary paperwork, or filing an incomplete return can also cause major delays in processing while rectified – or even trigger an audit.

Staying on top of deadlines and avoiding common filing slip-ups takes diligence but is completely doable.

• Record all key tax dates the moment you register your business
• Sign-up for automated reminders from the IRS a month or more prior
• Consider enlisting an experienced tax preparer to handle filing correctly and efficiently

As your small business grows, using qualified professionals can provide helpful guidance and prevent easily avoidable errors.

Mistake #4: Mixing Personal and Business Finances

Intermingling personal and business accounts, credit cards, assets, or other finances muddies the waters come tax season. Without clear documentation separating one from the other, successfully filing your return becomes exponentially more complicated.

Plus, the practice raises red flags with the IRS in regard to:

• Undocumented expenses
• Income verification issues
• Questions around taking distributions or loans from the business
• Unexplained commingling of personal and business funds

To avoid headaches, implement best practices like:

• Opening dedicated small business checking and credit card accounts under your registered business name and tax ID
• Providing company cards to employees who make purchases for work rather than reimbursing personal expenses
• Establishing an organized record-keeping process to easily differentiate between personal and business transactions
• Working with a tax professional or accountant to determine reasonable wages or distributions to take as the business owner

Keeping your financial ducks in a row goes a long way during tax preparation.

Mistake #5: Not Seeking Professional Help

As a busy owner, you simply can’t be an expert on every aspect of running a successful small business. Tax accounting falls into that category.

Confusing regulations, filing coordination across business structures, properly claiming credits, and many other scenarios exist where seeking tax guidance from a professional can mean the difference between sinking and swimming.

• Have a tax preparer handle your filing to avoid costly rookie mistakes
• Consult with a small business tax specialist when establishing a new business entity
• Seek advice from an enrolled agent or CPA prior to buying expensive equipment or assets to maximize write-offs
• Leverage expert support to understand quarterly estimated income tax payments

Yes, outsourcing tax help represents an additional expense, However, avoiding lost deductions, penalties, interest charges, and other unnecessary costs makes up for it in the long run – many times over.

Key Takeaways

Staying tax compliant ranks among the less glamorous, yet most vital, aspects of running a small business. Simply put – mistakes can get very expensive.

While no one intentionally courts problems with the IRS, hectic schedules and shifting priorities often push tax filing, payments, and record-keeping to the back burner.

Safeguard yourself by avoiding the common errors outlined above:

• Inaccurate or incomplete financial records
• Misinterpreting complex deduction and credit eligibility
• Blowing deadlines or submitting the wrong paperwork
• Co-mingling personal and business finances
• Attempting complex tax situations without professional expertise

Implementing diligent processes gives small business owners greater confidence during tax time. And leveraging professional guidance provides further peace of mind. With some concerted focus on addressing these common pitfalls proactively, you can avoid unnecessary stress and wasted money.