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Commonplace Tax Mistakes Small Business Owners Make

unnamed (34)Taxes, like death, are unavoidable and often burden small business owners. However, with the right strategies, small businesses can lower their tax burdens and save more money. In order to save more money, business owners should be aware of common tax mistakes that are made by many small business owners so they can avoid losing money.

1. Doing it yourself.

You already have enough work to think about as a small business owner, so why stress over taxes too? The federal tax code is compiled of thousands of pages that you probably don’t have time to read up on anyway, so why not just leave it to the experts? Having the professionals do your taxes insures the highest deductions versus you trying to understand a bunch of complicated tax terms. Plus, having someone else do your taxes supplies you with more time to grow your business.

2. Using the wrong legal entity.

Sole proprietorships are one of the most audited business types, so if your business is registered as a sole proprietorship after your business has grown, the title is actually hindering your business. Having a different entity designation can allow more deductions for your business in some cases and provide better legal protection.

3. Mixing expenses.

One of the most common mistakes with small businesses is not keeping personal and business expenses separate. Although these expenses may be small, they add up quickly. One expense here and there may not seem like a big deal, but that odd expense every once and a while can end up costing you money and potentially triggering unnecessary audits. So make sure to keep an eye on all expenses so you can easily distinguish business from personal.

4. Not properly classifying employees.

When classifying employees, there are a few questions you should ask yourself. Do you dictate when and where the person works? Do you reimburse their expenses or supply the tools and equipment necessary for their job? The rules on how to classify employees and independent contractors are not as vague as most people believe, so it is important to treat your employees appropriately and accurately based on their status from a tax standpoint.

5. Not properly deducting startup expenses.

Make sure you are adding up startup expenses! The IRS allows deductions of up to $5,000 for the first year of expenses, but many small business owners miss this large deduction. In addition, your business can receive $5,000 for organizational expenses, such as having the correct legal entity. These deductions alone add up to $10,000, and that’s just in the first year!

6. Not properly planning for taxes.

Don’t wait until the deadline to file for taxes. Instead, practice “forward taxation” and keep up-to-date on tax consequences throughout the entire year. This way, you can stay on top of everything and you’ll receive a better net effective tax rate when it does come time for filing taxes for you business. Plus, you won’t have to stress over rushing to complete your tax forms before the deadline.

7. Not keeping accurate records.

The best advice is to keep everything organized properly. In other words, don’t store all of your receipts and records in a shoebox and call it good. In the age of technology, there are a variety of digital tools available that are effective and simplify keeping track of your expenses without being overwhelming.

8. Not using carryover deductions.

Don’t forget to carry over deductions that can’t be used! For example, if you had $10,000 in expenses for the year, but you were only allowed to deduct $5,000, you can still carry over the other $5,000 to use for the following year.

9. Not filing on time.

Many small business owners are unable to complete their tax returns on time, so they often file for extensions. However, if you don’t file your returns on time, you can be penalized, which means you owe more money. If you file an extension or are late, you will have to pay a five-percent penalty for every month that you don’t file your taxes.

10. Using the wrong tax professional.

As mentioned previously, you should have a tax expert do your taxes for your small business, but it shouldn’t be just anyone. They should have more than just a general knowledge of your business in order to correctly file taxes. Also, don’t hire someone who is just a licensed tax preparer; they should also have a good understanding of small businesses. Remember, the federal tax code is complex with many specific sections for all sorts of different industries, so find someone who truly understands the code. Taxes are a huge expense for small businesses, so it pays to have an expert who knows what he or she is doing.

Taxes, like death, are unavoidable and often burden small business owners. However, with the right strategies, small businesses can lower their tax burdens and save more money. In order to save more money, business owners should be aware of common tax mistakes that are made by many small business owners so they can avoid losing money.

1. Doing it yourself.

You already have enough work to think about as a small business owner, so why stress over taxes too? The federal tax code is compiled of thousands of pages that you probably don’t have time to read up on anyway, so why not just leave it to the experts? Having the professionals do your taxes insures the highest deductions versus you trying to understand a bunch of complicated tax terms. Plus, having someone else do your taxes supplies you with more time to grow your business.

2. Using the wrong legal entity.

Sole proprietorships are one of the most audited business types, so if your business is registered as a sole proprietorship after your business has grown, the title is actually hindering your business. Having a different entity designation can allow more deductions for your business in some cases and provide better legal protection.

3. Mixing expenses.

One of the most common mistakes with small businesses is not keeping personal and business expenses separate. Although these expenses may be small, they add up quickly. One expense here and there may not seem like a big deal, but that odd expense every once and a while can end up costing you money and potentially triggering unnecessary audits. So make sure to keep an eye on all expenses so you can easily distinguish business from personal.

4. Not properly classifying employees.

When classifying employees, there are a few questions you should ask yourself. Do you dictate when and where the person works? Do you reimburse their expenses or supply the tools and equipment necessary for their job? The rules on how to classify employees and independent contractors are not as vague as most people believe, so it is important to treat your employees appropriately and accurately based on their status from a tax standpoint.

5. Not properly deducting startup expenses.

Make sure you are adding up startup expenses! The IRS allows deductions of up to $5,000 for the first year of expenses, but many small business owners miss this large deduction. In addition, your business can receive $5,000 for organizational expenses, such as having the correct legal entity. These deductions alone add up to $10,000, and that’s just in the first year!

6. Not properly planning for taxes.

Don’t wait until the deadline to file for taxes. Instead, practice “forward taxation” and keep up-to-date on tax consequences throughout the entire year. This way, you can stay on top of everything and you’ll receive a better net effective tax rate when it does come time for filing taxes for you business. Plus, you won’t have to stress over rushing to complete your tax forms before the deadline.

7. Not keeping accurate records.

The best advice is to keep everything organized properly. In other words, don’t store all of your receipts and records in a shoebox and call it good. In the age of technology, there are a variety of digital tools available that are effective and simplify keeping track of your expenses without being overwhelming.

8. Not using carryover deductions.

Don’t forget to carry over deductions that can’t be used! For example, if you had $10,000 in expenses for the year, but you were only allowed to deduct $5,000, you can still carry over the other $5,000 to use for the following year.

9. Not filing on time.

Many small business owners are unable to complete their tax returns on time, so they often file for extensions. However, if you don’t file your returns on time, you can be penalized, which means you owe more money. If you file an extension or are late, you will have to pay a five-percent penalty for every month that you don’t file your taxes.

10. Using the wrong tax professional.

As mentioned previously, you should have a tax expert do your taxes for your small business, but it shouldn’t be just anyone. They should have more than just a general knowledge of your business in order to correctly file taxes. Also, don’t hire someone who is just a licensed tax preparer; they should also have a good understanding of small businesses. Remember, the federal tax code is complex with many specific sections for all sorts of different industries, so find someone who truly understands the code. Taxes are a huge expense for small businesses, so it pays to have an expert who knows what he or she is doing.

Robert Ritch has founded, built and successfully exited four multimillion dollar businesses. Rob now provides consulting and capital to early stage and growing businesses.

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