If you are like most small business owners, you are just gearing up for your annual taxes – sorting through receipts and bank accounts and trying to get a handle on last year’s finances so you can get through this year’s taxes before the deadline.
According to the Small Business Accounting Report, more than 70% of small business owners outsource their tax preparation, but that doesn’t mean they are off the hook. Even with an outside accountant handling your company’s taxes, you still need to make sure your business records are in order so an accountant can do his/her job properly. And record keeping can be a problem, with 33% of respondents listing “managing paperwork and receipts for taxes/annual audits” as one of the biggest challenges they face in the lead up to tax season. However, those aren’t the only challenges small business owners face as they prepare their taxes.
Here are five common tax mistakes small business owners make and the ways they can be avoided:
- They don’t understand all the potential tax authorities they may owe. You’ve started your business, things are going well, you’ve picked up clients across the nation, and you’ve even started hiring some full-time employees. Business is booming, and it’s great. But it also may impact where and to whom you owe taxes. As an individual you are used to your state and federal taxes, but as a business there are a host of new, potential taxing authorities. As CPA Janet Lee Krochman explained to Open Forum, “Besides the obvious IRS and related state agency, there are sales taxes, property taxes, payroll taxes, local taxes, excise taxes, self-employment taxes and other specialty taxes.” Taxes can become even more complicated if you pay employees who live in different states or towns. It is not uncommon for states and even county or district localities to have their own filings and deadlines. It may be tempting to try and save costs by doing your own taxes, but it pays to hire a qualified accountant.
- They mingle personal and business, especially when it comes to accounts and expenses. When you don’t have dedicated personal and business accounts, each year you have to review multiple accounts to determine where you spent personal money on business expenses or where you may have spent business funds on personal expenses. According to Inc.com, 45% of accountants say that “mixing business and personal expenses in deductions is the most common mistake business owners make.” This one mistake is one that can lead to an audit by the IRS. Luckily, there is an easy fix. Keep two separate accounts, one for your business and one for your personal funds. Make sure you run all business expenses through your business account. If you desperately need money for a personal expense, just write yourself a check, but, as much as possible, try to avoid this practice.
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