Filing a tax return for your business every year is a must, but making mistakes can lead to higher taxes than necessary, draw unwanted IRS attention, and cost you in interest and penalties. Here are 20 common tax mistakes to avoid for your small business:
**Tax Mistakes**
1. **Misreporting Income**
Your income might be reported to you and the IRS on forms like Form 1099-NEC if you’re an independent contractor or Form 1099-K for credit card transactions. Ensure the reported information is accurate. If any forms are incorrect and you can’t get them fixed, report the accurate amount and attach an explanation to your return.
2. **Failing to Report Income**
Bartering for business goods or services, or using virtual currency for transactions is taxable and must be reported.
3. **Overreporting Income**
When selling inventory, consider the cost of goods sold so you’re only taxed on your profit, not gross receipts.
4. **Not Applying the Limitation on Deducting Meals**
Only 50% of certain business meal expenses are deductible. Deduct half of the cost for wining and dining clients or meals during business trips.
5. **Mixing Personal and Business Finances**
Always keep personal and business finances separate by using different bank accounts and credit cards. This ensures clear records for business income and expenses.
6. **Not Having a Mileage Record**
If you use your personal vehicle for business, maintain accurate records to claim deductions for business driving. Check IRS Publication 463 for guidelines.
7. **Thinking the Home Office Deduction is an Audit Red Flag**
If eligible for the home office deduction, take it without fear. Refer to the IRS for more information on eligibility and claims.
8. **Overlooking Pre-opening Expenses**
Deduct startup costs incurred before opening your business, up to $5,000 in the first year. Costs exceeding this amount can be deducted over 15 years, with rules changing for total costs over $50,000.
9. **Not Utilizing Retirement Plans**
Contributions to retirement plans reduce your current tax bill. Various plans exist, like setting up an SEP by the extended due date of your return and contributing to it for that year. You might also qualify for a tax credit for starting a plan.
10. **Failing to Keep Basis Records**
Losses passed through to partners and S corporation shareholders can only be claimed up to certain basis amounts. Keep accurate records to claim allowable deductions on personal returns.
11. **Overlooking Carryovers**
Look into carryovers from past years, such as net operating losses, capital losses, investment interest, the home office deduction, and the general business credit, which might now be deductible.
12. **Not Obtaining Acknowledgments for Charitable Contributions**
For donations of $250 or more, obtain a written acknowledgment to claim the deduction.
13. **Underpaying Estimated Taxes**
When paying estimated taxes, factor in all applicable taxes, including self-employment tax and additional Medicare taxes. Avoid penalties by making timely and accurate payments.
14. **Not Claiming the Qualified Business Income Deduction**
This personal deduction, also known as Section 199A, is based on business income and can significantly reduce tax liability, though it’s not a business deduction.
15. **Fudging Worker Classification**
Ensure employees aren’t wrongly classified as independent contractors to avoid employer tax obligations. Misclassification can lead to severe penalties.
16. **Failing to File on Time**
Be aware of the filing due date, typically April 15th. If you can’t file on time, request an extension, but ensure to file by the extended due date.
17. **Failing to Attach Required Forms, Schedules, or Election Statements**
A complete return includes all necessary paperwork. For instance, attach an election statement if you use the IRS de minimis safe harbor to deduct rather than capitalize items.
18. **Not Understanding the Differences in Federal and State Tax Rules**
Federal tax breaks may not apply at the state level. Different states have unique rules regarding deductions and depreciations.
19. **Not Staying Up on Tax Developments**
Stay informed about tax law changes, as they may offer new deductions or refunds. Learn which changes apply to you and file amended returns if necessary.
20. **Not Disclosing Everything to Your CPA**
Always fully disclose all relevant information to your tax professional. This transparency can help avoid IRS penalties if there are issues with your deductions or tax liability.
