It’s that time of year when small business owners are forced to turn their attention to filing their income taxes. It’s usually a tedious process, and one that is hardly considered desirable by most business owners who are obliged to go through it, but you should still do your best to avoid any mistakes when filing.
Including mistakes in your income tax filing can cause you to pay more taxes than you really should, or it can cause you to be penalized on certain kinds of mistakes. Other mistakes can draw unnecessary attention to your return, and might even trigger an audit of your operation. Here are some of the most common mistakes made by small business owners when filing their tax returns, and hopefully after browsing through these, you can avoid making those same mistakes.
Failure to report income
Any business which engages in bartering for goods or services, is generating transactions which are taxable. Whether you go through a barter exchange or you’re trading one on one, you are still liable to pay taxes on the exchange. Even if you are paid in virtual currency for your goods and services, you are obliged to report on all of those transactions appropriately. Be advised that the IRS is now scrutinizing virtual currency transactions much more closely.
Reporting income inaccurately
Most forms of income are generally reported to you on information returns like the 1099-MISC form or the 1099-NEC form. IRS processing will always pick up what’s been reported to you, so it’s very important that you forward the correct information to them when you’re filing your taxes. If the forms contained inaccurate information, and you’re unable to have those forms corrected by the sender, you should just report the incorrect amount and include the appropriate adjustment. Along with this, you’ll have to attach an explanation of why an adjustment was necessary, so that you will only be taxed on the appropriate amount.
No record of mileage
When your personal vehicle is used for business purposes, it will be necessary for you to maintain specific records of this business usage. If you don’t maintain such records, there is no way you will be able to claim a deduction for business driving. You will be able to find all the requirements for record-keeping related to business driving in IRS Publication 463.
For a business which sells inventory items, it is necessary to include the cost of goods sold, so you don’t end up paying tax on gross receipts related to sales. Be aware that your income is only comprised of the difference between what you are paid for an item, and what it cost you to produce the item. This cost will be based on your inventory valuation method.
Mixing business and personal finances
Keeping these two separate is extremely important, because otherwise it’s very easy to miss a business deduction, or to inaccurately report personal income as business income. All kinds of mistakes are possible if you don’t make a strong effort to keep these two income streams completely separate from each other. You should definitely maintain a separate business bank account and a business credit card, so that it’s very clear what your business expenses are, as well as your business income.
Meal deduction mistakes
The IRS only considers 50% of some business meals to be deductible in any way. There is no doubt that entertaining a customer or paying for your own meals on a business trip are legitimate business expenses. However, the IRS only allows half of this business expense to be considered as a deduction, so if you report any more than that, it will definitely be flagged by the IRS and you’ll have to amend your filing.
Overlooking retirement plans
Most people are aware that any contributions made to qualified retirement plans can reduce your current tax bill, while also accumulating savings toward your retirement. There are of course, many different retirement plan options available to you, and you’ll have to decide which one comes closest to helping you achieve your retirement goals. If you don’t yet have a retirement plan in place, you can establish an SEP prior to the due date of your tax return, while also making a contribution to it for the tax year of the return. In such cases, you might even qualify for some kind of tax credit because you started your plan in that tax year.
Overlooking pre-opening expenses
It might be possible for you to take a tax deduction on your startup costs if this is your company’s initial business year. You may be able to deduct as much as $5,000 in that first year, and include further deductions which would be pro-rated over the next 15 years. There are special rules associated with situations where a business startup cost is greater than $50,000, and your tax lawyer can explain these to you, so you don’t make any mistakes in this area.
Underpaying estimated taxes
If you’re in a situation where you have to pay estimated taxes, make sure you don’t overlook taxes other than the income tax you owe. This could include self-employment tax for instance, and it might also include Medicare taxes. In most cases, you won’t be able to wait until your actual return is filed before you are obliged to actually pay your taxes. When you do pay for those taxes, you are not going to want to underpay them, because that is very likely to trigger some kind of tax penalty.
Not keeping basis records
Business losses which are passed through to S-corporation shareholders and partners are allowed to be claimed on personal returns with a limit on those basis amounts. As one example, an owner of an S-corporation who takes a loss deduction can only deduct the basis in stock and loans which have been made to the corporation. If records are not kept on this information, none of those losses can be claimed and the deduction will be lost. Basis consists of the acquisition cost of any property, minus the depreciation, and with any capital improvements added in.