Tax season is officially here. For such an important task that every business owner must address, filing taxes can be exceptionally complicated. Because of the difficult-to-navigate tax landscape, billions of dollars in penalties are issued to small businesses every year, Bloomberg reported.
Fortunately, you can keep your company safe from IRS fines simply by being prepared. Here are the top 5 mistakes business owners commonly make during the complex process of filing taxes.
1. Not filing on time
As a business owner, you know how critical maintaining deadlines are. You expect people to meet your deadlines, and you work hard to meet those that are important to others. Don’t cut yourself any slack when it comes to the IRS – know when your taxes are due. Remember, these are two separate acts, each with its own penalties.
Your tax filing deadline depends on the type of business you run and your fiscal year, according to the IRS. If your fiscal year runs in accordance to the calendar year:
- File by March 15 if you have a partnership or S corporation.
- File by April 18 if you have a limited liability corporation, a sole proprietorship or a corporation.
If your fiscal year is different than the calendar year, your deadlines are on the 15th day of the third month of your fiscal year (if you’re a partnership or s corporation) or on the 15th day of the fourth month of your fiscal year (if you’re an LLC, sole proprietorship or corporation).
If you see your deadline looming and aren’t confident you can get everything prepared on time, don’t panic. Simply request an extension by filling out Form 7004. This’ll give you an extra six months to get ready.
2. Not paying on time
If you request an extension, you’re only asking for extra time to file your taxes; you still have to pay by the appropriate due date. If you can’t pay in full, pay as much as you can. If you need to take out a loan to reach this amount, it’d be wise to consider this option, as IRS fees can add up quickly. For every month you underpay (or don’t pay at all), you’ll be charged 0.5 percent on the amount owed, up to a total fee of 25 percent.
3. Buying business essentials with the wrong card
When you file your business taxes, the IRS is looking for factual information about your company’s financial history for the year. The only way to accurately report every transaction is if you keep a consistent record throughout the year. Business owners often make two big mistakes that hinder their ability to maintain a thorough record: They use their personal card for business expenses, or they pay cash. To avoid a complicated tax season or penalties from the IRS, always use your business cards to pay for business essentials.
There are two main detriments that can come from incomplete financial records. First, you could miss out on some great deductions that you qualify for. If you don’t remember or can’t find proof of a deductible purchase you made, you can’t claim it. This isn’t ideal, but it won’t get you in trouble with the IRS.
What will get you in trouble with the IRS is if you file for a claim you know you deserve, but can’t prove it with the appropriate records.
4. Missing out on deductions
Claiming all the deductions you qualify for might just be the best part of tax season. Any chance to reduce the amount you owe is worth pursuing. According to a Xero survey, small business owners frequently miss out on money they’re eligible for by overlooking these deductions:
- Out-of-pocket expenses.
- Auto expenses.
- Office improvements.
Leaving this money on the table is a costly mistake far too many entrepreneurs make every year at tax time. Those that do take advantage of these opportunities know that the savings can have a big impact on their company. According to a survey from the National Small Business Association, small business owners said these deductions effectively stimulate growth:
- Self-employed health insurance costs (62 percent).
- Section 179 (36 percent).
- Start-up costs (32 percent).
- Bonus depreciation (31 percent).
- Work Opportunity Tax Credit (25 percent).
- Home office (22 percent).
5. Not being organized
Perhaps the biggest detriment to your business during tax season is ineffective organization and recordkeeping on your end. Do not let missing files, miscategorized documents or other recordkeeping blunders cost you in IRS penalties or unclaimed deductions. In addition to risking fines and missed opportunities, there’s a good chance your tax advisor will charge you extra just to get your records in an organized enough state to begin filing your taxes, Forbes contributor Michael Burdick noted.
To avoid costly mistakes due to disorganization:
- Work with a bookkeeper or accountant throughout the year – not just at tax time.
- Invest in accounting software that makes keeping track of expenses easy.
- Work with a professional accountant or tax attorney when filing your taxes.
Tax code is hard, no doubt about it. But when you keep yourself well-informed on general tax rules and work with a professional, you can tackle your taxes with confidence.