Tax Mistakes Small Business Owners Make

Most small business owners try to save every dollar humanly possible, but there are just some things you should not skimp on and that is on your tax preparation. Tax mistakes are a common occurrence, but if you are filing your taxes on your own, you need to be aware!

There are several tax mistakes small business owners make that we often see:

• Misreporting Income – this can be underreported or overreported.  Often this has to do with the business owners using the 1099’s received as their final income number. 

  
  

  As a business owner. You are required to track and report your income regardless if you receive a 1099 for the income.  We have seen an extra zero added, refunds that were not subtracted from the total amount and the combination of 2 vendor amounts included on one 1099.  1099’s are wrong all of the time. 

  
  

  If you accept credit card payments, make sure that you back out the amount of sales tax included in the 1099 amount if sales tax is applicable.  The most common mistake we see is that income is double reported.  For example: A client issues a 1099 for all amounts paid to you, but they paid with a credit card.  The credit card company will the issue a 1099 for all payments you received via credit cards.  We cannot stress enough that you need to track your income yourself.  

• Writing off personal expenses on your business tax return- There are some expenses that you would pay for whether you own a business or not, and can write them off as a business expense, but make sure you write-off only the business percentage. 

  
  

  For example: your cell phone is normally a business and personal expense.  You can write off only the amount used for business.  If you use the cell 65% for business and 35% for personal, you can only take 65% of your portion of the cell phone bill. 

• Misunderstanding of Depreciation - Depreciation can be a tricky concept to grasp and then throw in the Section 179 rules along with bonus deprecation and it all starts to blend together. According to the IRS: “Depreciation is the recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost.  Property can be equipment, furniture, buildings, machinery used for business.  The IRS assigns a standard useful life for the different types of assets.

The misunderstanding first comes in when someone does not understand an asset and that it should be depreciated.  The misunderstanding continues to grow when an asset has been misclassified and the wrong life has been assigned.  For example: a computer is business equipment and should be depreciated over 5 years.  It is possible that if certain criteria is met that you can write off the entire computer in one year.  It may also be the case where it is better if you spread out the expense over 5 years.  Every situation is unique.

• Avoid Paying Estimated Tax Payments– Money often feels tight for small business owners and they cannot bring themselves to send their money to the IRS, State or Local Tax agencies.  We completely get it, but aren’t you just delaying the pain?  The amount grows larger with every missed payment.  We know this sounds harsh, but if you do not have the money to make the payments, should you be in business?  If letting go of so much cash at one time creates panic or anxiety, then make payments more often.  Just get them paid, so that you do not accrue penalties or fines.

• Missing Eligible Deductions & Credits – Tax laws are constantly changing and it is often that deductions and credits are missed.  If you are concerned that money was left on the table, you can always amend your return to correct any mistakes.    

• Overstating your business expenses – The most common business expense we see this on is meals and entertainment.  The IRS does not allow entertainment to be deductible. Meals are allowed to be deducted, but depending on the situation it may be 50% or 100% deductible.

• Guessing on your mileage – All businesses have mileage.  You are required to keep a mileage log if you take the deduction.  This is one of the first items the IRS will ask for if you are audited.  You can track your mileage manually or with an app, whatever is easiest.  We also recommend keeping a copy of your schedule as an extra layer of documentation in case the deduction is challenged.  As part of gathering your tax documents, print off your calendar for the entire year at that time. 

• Mailing in paper tax returns – We do not see this very often, but occasionally we will see a paper prepared tax return mailed into the IRS. Mailing in tax returns is no longer the norm and just slows down the entire process. This also leaves you in the dark, not knowing where your tax return is in the process.  Too often, the return never makes it into the system and it takes a year or two before you even find out.

• Eliminating Important Tax Forms – Filing a business tax return requires several additional forms to be included.  Missing forms creates issues that are easily avoidable.  Reading the instructions should help you to make sure your return is complete.

• Missing Deadlines – Deadlines are easily avoidable as they are posted well in advance, but inevitably they get missed.  We have found that procrastination is what leads to missed deadlines.  Our strongest suggestion for you is to use one bank account to run all income and expenses through.  When it comes tax time, it will be easy for you to gather all of the necessary information to file on time.

• Not taking Advantage of Retirement Plans – As a business owner, you have the opportunity to contribute more money into a retirement plan than the standard 401k.  There are several different types of retirement plans to choose from with maximum limits of $61,000 for 2022.  Take this opportunity to stuff some serious money away.

• Misreporting charitable contributions – Charitable contributions are not listed as a business expense, but rather, flow through to your Schedule A on your 1040: Individual Income Tax Return. 

•  Calculating the Qualified Business Income Deduction Incorrectly – QBI is new as of 2018 and is fairly complex.  As a 20% deduction, you want to take every bit you can.  The most common mistake we find is that QBI is missed for rental properties.  Not all rental properties qualify for the QBI, but many do.

• Confusing State and Federal Tax Laws - Each state has their own tax laws and it is your responsibility to know them both and apply them correctly.  Often, we assume that the laws are the same and then misreport the expenses.

•  Incorrectly Classifying Your Business – Each business is required to report its business activity with the corresponding NAICS Code.  This code is important because it helps the IRS identify what income, expenses and the proper ratios to expect.  If you can not find the correct NAICS code, you can use the unclassified code of 999999.  We commonly see this code on tax returns and have to correct it.  Take the time to look up the correct code.

•  Skipping home office deduction – Claiming the home office deduction does not raise red flags like most people believe.  The home office deduction is a legitimate expense that many business owners are entitled to take. As long as your home office is exclusively and regularly used as your principal place of business you may take the deduction. 

• Relying on the IRS to find your mistakes – We all want to believe that the IRS will fix our mistakes (and in some situations they will), but for the most part, they are not aware of mistakes made.  If you find that you have made a mistake file an amended return to correct the return.

• Co-mingling of Funds - Mixing your business & personal Funds is never a good idea.  It makes tracking very hard and can create a mess.  If you have formed a LLC or a corporation you will lose liability protection, which leaves your personal assets unprotected.

• Lack of Recordkeeping – Too often we say “no” when we are asked if we want a receipt or toss them out at the end of the day.  Business tax records and receipts need to be kept for three years.  Credit card or Bank statements do not satisfy this requirement.  The IRS wants to see the detail not just the total amount.  As long as you can put your hands on the receipts if ever needed it doesn’t matter if they are organized or tossed in a box.

We know all of this can be confusing and overwhelming. We're here to help with your business taxes to ensure you are set up for success! Give us a call today!