Small Business Tax Preparation Mistakes Your Company Can’t Afford

Tax season can be extremely stressful for small business owners, especially if you don’t understand the taxpaying process. We get it. No one enjoys filing their taxes, even when small business owners turn preparation over to a skilled professional or CPA firm. Filing small business taxes is an important process, and if your company is doing it right, it should be a year-round process.

Keeping up to date in real-time makes the effort come tax season exponentially easier. But if you’re not staying on top of things, you could make these common mistakes while preparing your small business taxes.

#1. Failing to Keep Accurate Payroll Records

Payroll taxes or employment taxes are taxes that an employer withholds from employees’ paychecks to pay to the IRS. As an employer, you will have to withhold the correct amount of taxes from your employees’ paychecks. Payroll tax compliance is something that many small business owners struggle with. This can make small business tax preparation nearly impossible and may result in hefty penalties from the IRS. Keeping tabs on your payroll records and classifying employees correctly will save you significant time in the long run when tax season rolls around each year.

Statistics show that approximately 40 percent of small businesses incur an average of $845 per year in IRS penalties. To make sure that your payroll taxes are deposited correctly, outsource your payroll function to a payroll company. The benefits often far outweigh the fees.

#2. Not Understanding the New Tax Bill

Not understanding the new tax bill can cost your small business more money on taxes. The majority of the new tax law’s changes went into effect Jan. 1, 2018, which means people filing their 2018 taxes in 2019 will need to take these changes into consideration. Of importance to most tax filers is the fact that the new tax law altered the federal income tax brackets, doubled the standard deduction and changed many other tax credits and deductions.

Another important change small business owners should be aware of is the deductions acceptable for entertainment. The New Tax Bill eliminated the deduction for any expenses related to activities generally considered entertainment, amusement or recreation. Taxpayers may continue to deduct 50 percent of the cost of business meals if the taxpayer (or an employee of the taxpayer) is present and the food or beverages are not considered lavish or extravagant. The meals may be provided to a current or potential business customer, client, consultant or similar business contact.

Business Bookkeeping Services Starting at Just $199/month
Make Better Business Decisions Today!

#3. Not Knowing Which Income is Taxable

Most income you receive is fully taxable and must be reported on your federal income tax return unless it is specifically excluded by law. However, there is also nontaxable income that you may need to report on your tax return. The IRS is quite strict when it comes to income, so it’s best to report your full and correct income amount, else it will trigger an audit. It is essential you report all types of income, or if you are unsure to hire a professional tax accountant to help you classify  which income is taxable

#4. Forgetting to Include Receipts for Small Expenses

It is important to not forget to include all of your receipts for small expenses such as cab fares, office coffees, and things commonly paid for with small amounts of cash. These “small” expenses can add up quickly. Make sure you track all your expenses and check with your tax advisor about what you can and can’t deduct.

#5. Filing and Paying Taxes Late

If you file your taxes late—even if you file for an extension—you face penalties and fees that can stack up startlingly fast. Of all the critical tax mistakes small business owners need to avoid, this one could actually cost your small business the most. If you miss the tax filing deadline, your business will be assessed a 5% per month penalty by the IRS that will continue to increase until the return is filed. If you neglect to pay your taxes, the IRS will hit you with 6% interest, plus a late payment penalty of .5% each month after the April deadline.

Occasionally, some small businesses find themselves unable to pay their taxes. It is crucial that this information is communicated to the IRS as opposed to not paying it. The IRS may be open to a tax settlement or may be willing to negotiate once all your past tax returns are filed as well. If you can prove that you cannot afford to pay your taxes, the IRS may be willing to make a compromise and reduce your balance.

Limitless Investment and Capital’s small business tax preparation services

Limitless Investment and Capital pairs you with a dedicated tax professional to guide you to maximize tax savings and prepare your tax return. While running a small business, every penny counts. Your small business may have the ability to minimize taxes which could be the difference between profitability and just scraping by. Don’t pay more taxes than you owe and hire an expert from Limitless Investment and Capital.