Small Business

4 Common Small Business Tax Mistakes and How to Avoid Them

Tax season is stressful, especially if you’re an entrepreneur. The hassle of gathering data, preparing reports and submitting forms on time — all of which get in the way of day-to-day operations — can be overwhelming, to say the least. 

One of my clients experienced every entrepreneur’s dream: exceedingly fast growth. He was elated — he’d spent many, many hours maneuvering the brand around industry potholes and market-wide issues. But he found his success came with a price: Because he hadn’t adequately prepared for such a robust year in terms of taxes, it was almost as if he hadn’t made any money at all. It was a financial nightmare. 

As you go about gathering your information and calculating how much you owe Uncle Sam, here are a few common SMB tax mistakes to avoid:

1. Writing off all your startup expenses at once.

If you’re launching a new business, you’re probably tracking every penny you spend in order to write it all off at the end of the year. Before you get too excited at the thought of all those tax savings, though, think about the limitations the IRS has set for initial startup costs deductions.

According to the IRS Publication 535 (chapters 7 and 8, if you’re looking for the specifics), you can only deduct up to $5,000 in the first year. Everything beyond that must be amortized over a 180-month period of time. 

Although you can’t skirt IRS rules, you can maximize your deductions. Write off the full $5,000 if at all possible, and ask your accountant to help you spread out the rest. 

2. Failing to keep good records.

When there are customers waiting, it can be tough to make time to record every bill, paycheck, receipt or invoice that crosses your desk. But if you don’t have proof of your expenses, you won’t have proof of the deductions you deserve.

Be proactive: Use a digital accounting tool to help you and your staff keep track. Look for one that can auto-fill expenses from images you upload and store your data in the cloud, where it can’t be lost when that old desktop you’re using finally dies. I started using the receipt capture in my accounting system this year and love the ease of use to keep up with business receipts. 

One particularly important expense to get right? Payroll, which is the single largest expense many entrepreneurs face. According to research by payroll and HR platform OnPay, just 25% of small business owners feel confident they deduct and submit payroll taxes accurately. When in doubt, ask an accountant — and don’t wait until tax time to do it.

3. Abusing tax forms.

Just because you can use a form to help your tax situation doesn’t mean you should. For instance, you can file Form 5213 to ask that the IRS delay its decision as to whether a hobby-level business should be treated as a traditional for-profit company.

Although Form 5213 can buy you a five-year buffer of time during which you don’t have to worry about being audited, it isn’t a “get out of jail free” card. Often at the end of the period, the IRS will review the account — including a backward glance to see how you operated over the tax hiatus. 

Especially if your business is trying to make ends meet, it can be tempting to use tax forms to your advantage rather than for their intended purpose. But if you want your company to last, you have to keep the long game in mind. 

4. Bending (or outright breaking) deduction rules.

The concept of deductions can be intoxicating. But before you start writing off everything in sight, it’s important to take the time to understand deduction rules apart from the obvious startup limitations outlined above. 

For instance, while meals and entertainment related to work can be written off, only 50 percent of the expenses can actually be deducted. Mileage deductions are another common area of confusion: While the general rate stood at $.58 per mile in 2019, there were exceptions to that rule. Only 20 cents could be deducted per mile if you were using an automobile for certain medical care or as part of a move that was otherwise deductible. The maximum deduction for the year couldn’t exceed $50,400, including all trucks and vans.

Don’t bank on a certain deduction or tax maneuver to keep you in the black, and don’t wait until March to review your records. Be prepared, be thorough and be honest if you want tax season to go smoothly — and your future growth protected.

Published on: Jan 29, 2020

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.

Source

neallesh@yahoo.co.uk

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.