There are almost 1,000 different IRS tax forms, add that to filing taxes for the first time as a small business owner, and you have a recipe for serious stress.
Keep these common mistakes in mind all year long so when tax season comes around you’re less stressed and better prepared.
1. Math mistakes
Arithmetic errors are one of the leading causes for filing an amended tax return and the first thing that the IRS will check. The long rows of numbers can mind-numbing, not to mention confusing, making it very easy for you to mess up a number or two. Unfortunately, these innocent errors can result in owing more money than you should or a reduced refund. Check your numbers and check them twice.
2. Not knowing your tax year
In order to calculate your taxable business income, you must know your tax year. A tax year is the annual accounting period kept for reporting your income and any expenses you incur—either calendar year or fiscal year. There are specifics for adopting each and filing your taxes every spring.
Note: This important to know because once your tax year is set, you have to get IRS approval to change it.
3. Forgetting your signature
You’re running a small business; it’s easy to forget the smallest, yet most important details. When it comes to taxes, this could mean forgetting to sign the form when you’re done. It's an easy step to forget, especially in the event that you’re close to the deadline. ,Make sure you sign on the dotted line before submitting the form. If you don’t, you’ll need to re-file, because an unsigned form is not considered valid.
4. Combining your business and personal expenses
This mistake will make tax season a lot more complicated than it needs to be. Running your personal expenses—like medical bills, groceries, etc.—through your business is a major red flag for the IRS. In addition, deducting for leisure travel as a business expense is not permitted and can trigger an audit.
It’s best you have a totally separate business account and refrain from using your business card for any personal matters. If you haven’t yet, do this now, or as soon as possible.
5. The wrong business structure
There are specific legal and tax implications depending on the business structure you chose. For example, if you’ve filed as a C corporation, you could essentially be paying taxes twice. Other tax-friendly structures, such as the S corporation or LLC, will be better for your small business in terms of taxes and finances.
If you’re not sure which one to choose, consult with a CPA or other financial expert before tax season rolls around.
6. Forgetting about state taxes
State and local taxes apply to small business owners in addition to federal taxes. Each state is different and having knowledge of the requirements can actually save your business money. In addition to income taxes required by the state, businesses with employees are required to pay state workers’ compensation insurance and unemployment insurance taxes. Visit the U.S. Small Business Association to determine your state’s tax obligation.
7. Not current with tax changes
It’s hard to stay in-the-know regarding tax modifications and new procedures each year, but that extra effort will pay off in the long run. New tax and deduction options open up every year, so check to see if you can take advantage of any of them. The best way to do this is by checking the IRS’s website. It will have all of the information you'll need to know before filing.
8. Incorrectly deducting
Startups costs, such as computers, equipment and renting office space, seem like quick and easy deductions, but they can’t be deducted until your business has its first sale. After that, they’re deducted over the next 15 years. There are different options available for businesses with startup costs both over and under $50,000, so make sure you keep all of your receipts for purchases and check with the latest IRS laws for deductions.
9. Filing late
Taxes are due on April 15 for Sole Proprietors and single-member LLCs. March 16 is the big tax date for corporations and S Corporations. Speak with your financial advisor about submitting quarterly taxes, which is a “pay-as-you-go” system for small businesses. This is an easy way to avoid being overwhelmed when the main tax day comes around.
10. Not filing for an extension or payment plan
If it’s already April 10 and you've completely forgotten to file your business taxes, it’s much better to file for a tax extension. It does require you to estimate how much you owe and send in that amount by the due date or risk invalidation of your extension. In addition, if you know you can’t afford to pay your tax bill before it’s due, contact the IRS to set up a payment plan—there will be a flat-rate fee but it’ll be lower than the monthly fee if you don’t.
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