Form time to time we all make mistakes, like forgetting an anniversary or leaving your keys inside your car while the car still running. However, some mistakes can be costly to your business venture and be detrimental to its growth and success. As an entrepreneur, avoiding these expensive mistakes during the preparation of your business tax returns is crucial.
Here are five of these costly small business tax mistakes:
1. Failing to file and pay your taxes on time
The IRS imposes a 5% monthly penalty (up to 25% maximum) when you forget to file your business tax return. If you operate as a Corporation your business tax filing deadline is March 15. Sole-proprietorship and LLC deadline is April 15. You can request additional time to file by filing an extension form no later than the original due date of your business tax return.
Many business owners believe that the extension of time provides them an extension to pay their business tax liability. However, the IRS does not provide additional time to pay your business tax liability. All business tax liability must be paid no later than the original due date of the tax return. If you forget to pay your business tax obligation the IRS charges 6% interest a year on unpaid taxes, in addition to late payment penalties of .5% per month after the April 15 deadline.
2. Not taking eligible business deductions
You might be thinking “That can’t possibly be deductible”. It will surprise the amount of business tax deductions that are missed with that thinking. For example, The dry cleaning for the suits you wore at the business conference in Las Vegas is deductible if you were away overnight.
You would think that there is a list buried in the Internal Revenue Code or provided by the Internal Revenue Service. However, that is not the case. All we have is Code Section 62 that states that a business may deduct “ordinary and necessary” business expenses in the production of income. There are a number of ordinary business expenses that are occasionally missed in the business tax return. Here are some of them:
Bad debts that you cannot collect
Commissions to outside parties
Continuing education for yourself to maintain licensing and improve skills
Conventions and trade shows
Dining during business travel
Dues and subscriptions
Family members’ wages
Internet hosting and services
Organizational expenses (start-up expenses)
Software and online services
Website design and internet hosting and services
3. Poor record keeping
Record keeping is the back bone of every successful business. When you have good financial records, you will be able to maximize your deductions in your business tax return. Also, in the event of an audit it serves as evidence for your business tax deductions. Needless to say that without a good record keeping, the business tax return preparation becomes a daunting task, which leads many business owners to fail to file returns for a number of years (see number 1 above).
Today, we have many options available from DIY using an online accounting software program like QuickBooks or outsourcing your accounting needs to an expert.
4. Over-reporting income
If you sell goods on which you collect sales tax, your reportable income should not include the sales tax. Be sure to subtract the sales tax before reporting the income from the sales.
5. Forgetting carryovers
Certain unused deductions and credits may be carried over and used in a future year. For example, if you couldn’t take the full home office deduction last year because your income was too low, you’re allowed a carryover that can be used the following year. Other carryovers: capital losses, net operating losses and general business credits.
Let me know what you think about business tax mistakes.