Do you like to pay unnecessary taxes? I have not met one person yet who enjoys paying taxes or that looks forward to paying more taxes than necessary. However, every year small business owners are victims of tax traps that cost them millions of dollars in unnecessary taxes. Most tax traps are easy to prevent by keeping good records or due diligence.
Here are four of these tax traps that all business owners must avoid:
1. Getting Stuck with a Prior Owner’s Tax Bill – Did you know that you could become responsible for the seller’s unpaid tax, interest and penalties up to the purchase price of the business or stock of goods. Before buying a business, protect yourself from this liability by requesting a certificate of tax clearance each state has different rules. For example in Florida To request a tax clearance certificate, visit the Florida Department of Revenue webpage or call 850.617.8681. If any tax money is owed, the current owner will be notified and advised to pay the amount due, or you will be advised of an amount to withhold from the purchase price.
2. Dumping Financial Records Too Soon – business owners should save business records for a minimum of five years in the event of an audit. Prudent business-people may want to keep business records for up to seven years. If you don’t keep accurate records, government auditors may estimate your tax liability. You’ll have a difficult time challenging a government estimate without proper records.
3. Lumping Equipment Purchases With Your Supplies – There is no need for small business owners to do this. Equipment is a capital expense that has to be depreciated. Special rules do allow most small businesses to write off about $25,000 for tangible personal property in the year that property was purchased. However, you still need to report these purchases as a capital expense – electing to use this special method of expensing the costs.
4. Forgetting About Reimbursables – This is a common mistake made by small business owners. Most business owners pay for business expenses out of their own personal accounts. While there’s nothing wrong with this, it does need to be properly accounted for. Your company should have an established plan that deducts the expenses, allowing employees to avoid paying tax on reimbursements.
While the list above is not all inclusive it will give you a start for tax traps that may be draining your business by paying more tax than you should. In 2015 commit yourself to keep better records and to avoid unnecessary taxes.