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The Top Tax Mistakes Made by Small Businesses

Do you count yourself among the 30 million Americans who own and run a small business enterprise? Every year, more Americans decide to be their own boss and pursue their dreams of financial independence. Unfortunately, most of these small businesses are likely to fail, not because they lost their drive to succeed but rather because they made critical mistakes in areas of finance, management, and taxation. Therefore, every successful business needs a strong financial and tax foundation so it can grow and flourish.

Then what happens when a company's tax foundation is unsteady? It may encounter stress, tax audits, or even insolvency. Tax mistakes can result in hefty fines and penalties. Even though this happens to some individuals, it doesn't have to happen to you. If you own a business or are thinking about starting one, this blog will give you all the information you need to feel confident about your tax operations and build the business of your dreams on a solid foundation.

Turn to the pros at Duran Business Group for tax services and continue reading to learn about the top tax return mistakes made by small business owners and how to avoid them.

Misreporting income

The IRS uses a computer to compare the information you report to them with what has already been reported to them. For business owners, this procedure is often done via different 1099 forms. The form, such as the 1099-MISC, which includes non-employee compensation, may disclose some of your income to the IRS. Along with a 1099-R for retirement accounts, you will probably also receive 1099s from your investment accounts.

All of that income must be reported in your tax returns. However, if it is reported in the wrong place, the IRS may flag your return for an audit. 

It could be tempting to underreport your revenue when you run your own business. Some entrepreneurs even attempt to accept payments in Bitcoin or another digital currency. If your company trades goods and services, you must pay taxes on those transactions, whether they are one-on-one or barter exchanges. Also, you must properly report any transactions made using digital currency. The IRS is actively monitoring transactions involving digital currency. 

Many small business owners prefer to discuss their gross income rather than their net income when talking with a financial consultant. Saying “I made $2 million last year” rather than “I made $600,000 in profit” sounds better. However, take the cost of products sold into account so that you don't pay tax on your gross income. Your net income is the difference between your sales and the cost of production (based on the value of your inventory).

Deducting 100% of business meals

If you are entertaining your customers or paying for your own meals on business trips, only 50% of the bill is tax deductible. So, don’t try to deduct the entire amount. This small mistake can cause big headaches down the road.

Mixing personal and business finances

Use separate credit cards and accounts for your company's expenses. That will make it much simpler to keep track of deductible expenses. Usually, buying groceries would not be considered a business expense, but buying snacks and drinks for a customer would. It will be easier to distinguish between business and personal expenses if you pay for such expenses on a company credit card.

Failing to file on time

Note the deadline for filing your tax returns. Request a filing extension if you are unable to file by the deadline for whatever reason. The more complex your business is, the more likely you will need to file for an extension every year. Don't let it serve as an excuse to put off filing. Submit your paperwork by the extended deadline date.

Not having a mileage record

Many business owners own personal vehicles that they occasionally use for business. To have a mileage deduction from your taxes, you must keep specific driving logs. If you fail to do so, you lose this tax saving option. IRS Publication 163 outlines the conditions for mileage deductions.

Avoiding home office deductions

This is a general misconception that should probably be debunked. Enjoy the benefits of the home office deduction if you can work from home.

There are specific rules around what you can deduct for home office expenses. Abusing this deduction can land you in hot water with the IRS. Visit the IRS home deduction website for more details on the home office deduction.

Underpaying estimated taxes

Make sure you include all of the taxes you will owe if you have to pay estimated taxes. This comprises Medicare taxes (0.9% on earned income and 3.8% on net investment income above a certain threshold) and the self-employment tax. Tax penalties can apply if you don't pay your quarterly taxes on time during the year. In my opinion, paying fines and penalties for late filing is the only thing worse than paying too much in taxes.

Mixing up federal and state tax rules

Each of the 50 states has its own unique peculiarities. In some states, certain tax breaks are restricted, while in others they are more lenient. For instance, Section 179 and bonus depreciation are subject to various state regulations. Federal taxes apply regardless of which state you choose to operate your business in.

Other tax return mistakes made by small business owners are:

  • Not doing any tax planning
  • Not keeping charitable contribution receipts
  • Failing to attach required forms, schedules, or election statements
  • Ignoring your bookkeeping throughout the year
  • Overlooking carryovers

Bottom Line

Transparency and organization are the top two solutions for avoiding tax issues. It's difficult to get into problems if you carry out your duties at the right times, just as in real life. And finally, behave with integrity, honesty, and good intent.

We are aware that, as a small business owner, your personal and business lives are intertwined and that even insignificant choices can have serious effects. We help you draw a clear distinction between your personal and business lives. We guarantee that we will solve your company's financial difficulties and that you need a tailor-made solution for your tax issues. Duran Business Group was established with the intention of assisting you in fulfilling your dreams.

With 15 years’ experience, our IRS Enrolled Agents are knowledgeable and remain up to date on the latest policies and regulations for representation. Get professional help from our tax and business service teams to keep your taxes under control and avoid penalties; contact us today!