Running a successful business isn’t for everyone because it isn’t easy. Challenges and issues come up, especially during the first year a business is up and running. Like anything else, learning how to run a business is often trial and error. While you can expect to make mistakes during the learning process, here are several common tax mistakes by small business owners and tips for how to avoid them.
Failure to Deduct Your First Year is a Common Tax Mistake
Maybe it’s the excitement of finishing up your first year of business with relative success, or perhaps it’s a genuine lack of information. For whatever reason, many business owners forget that they’re entitled to write off the expenses that they incurred during the process of opening their business.
In order to ensure a smooth process when deducting expenses involved with opening your business, keep all of your receipts. Aside from keeping physical records of your expenses, creating an expense report is another great way to itemize the costs you incurred. Make sure that you only include expenses related to opening your business, or issues with the IRS may ensue.
Avoid Errors in Payroll Records
If you’ve got employees, you’ll want to keep very careful payroll records for several reasons. Not only do you risk payroll disagreements if your bookkeeping is off, it’s also a quick way to make a mess of your taxes. Payroll errors are a somewhat common tax mistake for small business owners.
Paying your employees for their work is an expense on your behalf, and failure to correctly record your expenses opens you up to all sorts of legal issues. Even with the best of intentions in mind, honest payroll mistakes can still very easily lead to penalties from the IRS.
Because payroll errors are most common during the first year of a business’s operation, it’s important that you take the necessary steps to work around the possibility of errors. Invest in bookkeeping software as well as keeping a close eye on your employees’ timecards. Take time once a week to go through your payroll records to spot any discrepancies before they become serious problems. This leads to the following point:
Common Tax Mistake: Outdated Records
A business works only as well as its records are kept, and a common tax mistake with new businesses is the keeping of records. Many times, small business owners are quite busy during their first year of operation, to the point that they skip over the important process of scanning over business records and ensuring that they’re kept up to date.
It’s important for business owners to set aside time to go over their records, looking for any mistakes or other issues that might come up due to record neglect. Experienced business owners often look over their records quarterly, but for new business owners, performing a records check should be done at least once a month to avoid the common tax mistake of getting behind and using outdated for their tax returns.
Exaggerating Your Expenses or Deductions
Exaggerating on your tax returns is a common tax mistake, even for small business owners who honestly do not want the IRS breathing down their necks. Keep in mind that the IRS knows how small businesses work. They have calculated the standard cost of many different types of businesses, as well as reasonable swings. If you’re going overboard with the deductions that you’re claiming or the expenses that you’ve incurred, someone at the Internal Revenue Service is going to get suspicious. When the IRS has perked up to something that does not sound right to them, it’s usually going to lead to issues.
If you want to avoid this at all costs, do what you can to not to arouse suspicion. Your tax preparer should be able to tell you if something on your tax return appears abnormal and help you avoid submitting a return that’s likely to get you audited.
In general, don’t claim every single deduction that even slightly applies to you, and don’t try to deduct every business lunch expense you’ve ever incurred. Be reasonable and conservative when it comes to your tax returns so that your average deductions and expenses do not appear odd.
The IRS is Not Your Only Obligation
Filing your taxes is one of those things that we all have to do once a year, whether we’re small business owners or not. It’s a duty that we can’t ignore unless we want to face penalties issued by the IRS, or worse: jail time. This obligation can be a frightening one, but it’s important to understand that as a small business owner, the IRS is not your only obligation when it comes to the taxes you’re expected to pay.
If you own a physical business office, you’re going to need to remember to pay your property taxes. There are also self-employment taxes if they apply to you, as well as local taxes and payroll taxes. You must be compliant with every sort of tax that you incur and be sure that your compliance is also completed in a timely fashion. Lateness can end up being very costly when it comes to any sort of tax you might be responsible for. Unfortunately, these issues are fairly common tax mistakes for new businesses.
Above anything else, be careful. There is no room for laziness or cutting corners when it comes to running a business. Dedicating yourself and your time to develop something this important is how many business owners make it past their first year and go on to keep successful businesses for years and even decades to come.
If you’re in the market for a reputable tax preparer, consider West Austin Tax for your income tax questions and services. You can visit our website for information, video resources, or to schedule an appointment with one of our professionals. You can also call (512) 330-9400 for more support.
*West Austin Tax is not a CPA firm.