8 Common Tax Mistakes That Business Owners Make And How To Avoid Them
Learn how to avoid confusion during tax season
Common tax mistakes business owners make
In order to avoid making common tax mistakes, you should know what they are. Understanding the different types of income that can be taxed will help you determine which type of tax return you need to file. You also need to make sure that your business is set up correctly and has been filing all necessary forms with the right agencies over the years. This is something your bookkeeper or accountant can help you with. If not, it might be time for a consultation with a tax professional or lawyer who specializes in this area of law.
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Tax Season Stress
Tax season is an anxious time for most Americans and business owners in particular. It’s easy to make mistakes when sorting through all of the details and information included on your tax forms, but making one simple mistake can end up costing you big time. Here are some of the most common mistakes that business owners make during tax season:
- Misreporting Income
- Failing To Report All Of Your Income
- Overreporting Income
- Attempting To Deduct 100% Of Your Meal Expenses
- Mixing Personal And Business Finances
- Not Doing Any Tax Planning
- Not Deducting Taxes For Home Office
- Not Tracking How Many Miles You Drive
It is a stressful time for a small business owner. Aside from finding a solution to all of your tax-related problems, you have the extra stress of knowing that only so much money is available to be spent on yourself or fun activities with your family or friends because you have to save some for taxes. Going through all of them is one way to avoid making common tax mistakes. Knowing and acknowledging there is a problem is the first step toward fixing it. Finding a tax preparer that can work with you to navigate this process will eliminate stress and reduce the time required to complete the tasks.
How To Avoid Common Tax Mistakes
Having an understanding of each tax deduction is important to ensure you are not missing any valuable tax deductions. You always have the option to hire a qualified accountant, who should be experienced in filing taxes for small business owners. An experienced CPA will know how to apply each tax law to your situation and help you lower your taxable income as much as feasibly possible. Avoiding common tax mistakes can save you a lot of money and time. Tracking your mileage for business, planning ahead for tax deductions, and keeping separate bank accounts are all good ways to avoid common tax mistakes.
Common Tax Mistakes
Misreporting Income
According to Section 270A (1), the income tax authority may demand a person who has under-reported income to pay an additional penalty. The understated revenue might be intentional or due to unintentional misreporting of revenues. The penalty is usually equal to 25 percent of the underreported income. Remember that it is your responsibility to report and pay income taxes and that you must be familiar with the rules. Avoiding common tax mistakes will save you a lot of money.
Failing To Report All Of Your Income
Did you know that millions of Americans fail to properly submit their tax returns each year? This is done either by neglect or ignorance. The IRS regularly audits people who are often targeted because they have not reported all of their income. You can get fined or penalized by the IRS for not reporting cash income or payments received under contract work. On top of the tax bill you owe, non-reporting of taxable income or payments received may result in hefty fines and penalties from the IRS. Even if you are years behind on your taxes, it is essential that you straighten out your tax situation to avoid potential problems.
Overreporting Income
Some people may overreport their income in order to get a bigger tax refund at the end of the year. It is quite common for IRS not to care if you exaggerate your earnings and overpay your taxes. However, it is considered criminal fraud to obtain a loan on the basis of false information. If your application was sent by mail, you may be charged with mail fraud in addition to the original charge. The IRS can also bring a charge for submitting false information to the US Census Bureau.
Attempting To Deduct 100% Of Your Meal Expenses
Your home office deduction cannot include 100 percent of your meals and entertainment expenses. The cost of business travel, including accommodations and meals, is deductible as long as it is not lavish or extravagant. However, the cost of your meal while traveling is not tax-deductible. This means that you cannot claim 100 percent of your meal expenses when you are on business travel. You should only deduct the portion that represents the cost of conducting business during your trip.
Mixing Personal And Business Finances
Keeping track of two separate bank accounts can be challenging, but doing so will ensure that your business finances are kept separate from your personal accounts. Many entrepreneurs believe that combining personal and commercial finances is a good technique to manage a new or developing business. However, this method might produce a lot of problems for company owners. Having only one set of accounts exposes you to more risk. A financial disaster at your firm might result in the loss of both your personal and professional assets.
Hiring An Accountant You Do Not Know
You should always hire a qualified and experienced accountant. Some people make the mistake of hiring any person who helps them file their taxes each year, without considering their experience and qualifications. Working with an inexperienced accountant might be more costly than you think. There are some accountants that can charge you too much and some who may not be able to help you with your taxes correctly. Avoiding common tax mistakes can save you a lot of money and time.
Not Doing Any Tax Planning
Some people fail to prepare for the upcoming tax season. They wait until the last minute before hiring an accountant or buying software that can help them file their taxes. This is a serious mistake because there are ways to save money that only apply during certain times of the year, like IRA contributions or quarterly estimated payments. You should plan ahead and take advantage of all tax benefits and deductions to lower your tax liability.
Not Deducting Taxes For Home Office
Employees who work from home may deduct a portion of the expenses associated with running a home office, including a percentage of utilities and homeowner dues. If you are self-employed, you should definitely include your home office deduction in your tax filing. Having a dedicated workspace for business enables you to take advantage of home office deductions that can lower your taxable income.
If your home office deduction is not listed on your tax return, the IRS may consider your home office a personal space that has nothing to do with business. You can avoid this mistake by making sure that you always include this deduction when you file your taxes.
Not Tracking How Many Miles You Drive
You can deduct the cost of business-related driving as long as you keep track of the number of miles that you drive for work. This information will help you determine what percentage of your car’s expenses are tax-deductible. You should complete Form 2106 and include it with your tax return to claim this deduction. The IRS allows taxpayers to deduct either their actual car expenses or a standard amount that changes from year to year.
Avoid costly mistakes during tax season
While hiring a professional to take care of your taxes can be costly, it’s well worth the money. If you’re not sure how best to go about filing your taxes, then seeking expert advice can be a wise decision. Over time, an accountant will help you increase your net revenue by applying every tax strategy possible and maximizing deductions. With their help, your business can grow more rapidly and attract potential investors.
Gilbert Tax Preparation Services is a company that specializes in providing expert assistance with tax preparation and audit defense. We have been in business for over 30 years and have a team of experts who are dedicated to helping our clients achieve their financial goals, whether it be a financial analysis of your business, planning your retirement, or even setting up an estate and living will. You can be confident knowing you will receive the best possible services from Gilbert Tax Preparation Services.
Our expert Cindi Crenshaw is a member of NATP or the National Association of Tax Professionals. She has the knowledge and commitment to excellence needed to help you with all your tax preparation needs. Cindi has over 30 years of experience helping individuals and small businesses become better informed about their taxes and understand exactly what is required to comply with IRS regulations, as well as financial audits. Gilbert Tax Preparation Service provides individuals and businesses of all sizes a wide range of services including Accounting Services, Bookkeeping, Tax Preparation, Financial Audit Preparation, and more.
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You don’t have to go through the tax season alone. Gilbert Tax Preparation Service is here to help. Contact us today to schedule a free consultation and see how we can make tax season a little less stressful.