“Ten Frequent Tax Mistakes Made by Small Business Owners (And How to prevent Them)”
You know how busy life can get if you’re a small business owner. Between managing your team, serving your customers, and running the day-to-day operations of your business, it can be easy to overlook certain details, including your US tax filing responsibilities. Unfortunately, not avoiding common tax mistakes can be costly, leading to penalties and fines from the IRS.
To help you stay on track and avoid common US tax filing mistakes, we’ve put together a list of the top 10 mistakes common in tax planning for small business owners and how to avoid them.
- Not reporting all income accurately: One common US tax filing mistake that small business owners should aim to avoid is failing to accurately report all income as it is received. This includes making necessary adjustments, such as if income was received in one tax year but reported by the payer in a different tax year.Inaccurate reporting of income can trigger an audit by the Internal Revenue Service (IRS) and potentially result in the assessment of additional taxes and penalties. According to the IRS, the most common mistake made on tax returns is the failure to report all income, which results in an estimated annual loss of $450 billion in tax revenue. To prevent this mistake, small business owners should ensure that they have received all necessary documentation, such as Form 1099-MISC, indicating income received during the tax year.
- Not consider the repercussions before filing certain forms or schedules: Filing certain forms or schedules may result in increased scrutiny from the Internal Revenue Service (IRS). For example, Form 5213 is used to request an extension to file a business tax return and may prevent an IRS audit for five years. The IRS may review the business’s returns after this period to determine if it meets the profit motive presumption. Before filing forms or schedules, small business owners should consider the consequences.
- Missing out on deductions: When filing their taxes for the first time, new businesses may be more likely to make mistakes, like overestimating the number of start-up costs that can be deducted. According to the Internal Revenue Service (IRS), only 50% of meal and entertainment expenses are deductible, and startup costs over $5,000 must be amortized rather than fully deductible in the first year of business.Petty cash, magazine subscriptions, and casserole ingredients for a charity meal are tax deductible. Stamps and marketing materials are tax-deductible. Know every aspect that can help your company save on taxes. Unknowingly, they can cost thousands. Save receipts so your accountant can help you with claiming tax deductions and preventing tax errors for small businesses.
- Overestimating deductions: We may overestimate how many things we can deduct, just like we may miss small write-offs. Business and personal concerns sometimes become entangled when running a business. Imagine stopping at Starbucks on the way to a business lunch. Which meals are tax-deductible? This can be dangerous for those new to business taxes and money. When in doubt, avoid audits.Startup cost deductions are limited for small businesses. The IRS lets you deduct up to $10,000 in first-year costs ($5,000 for startup costs and $5,000 for organizational costs) as long as the total costs don’t go over $50,000. If beginning expenses are over $50,000 but less than $55,000, a deduction is still available, but it will be decreased. Depending on how the business is doing financially, an experienced CPA firm may suggest waiting until the second or third year to take the first deduction.
- Improper record keeping: Maintaining thorough and accurate records is crucial for small business owners to properly prepare tax returns and support claimed deductions. Inaccurate or incomplete records may result in the oversight of legitimate write-offs, potentially increasing the business’s US tax filing liability. If you don’t keep good records, you may also lose tax breaks if your taxes are audited.To prevent these issues, the Internal Revenue Service (IRS) recommends that small business owners save receipts, invoices, and other papers that show income and expenses. Using an accounting tool, such as software or a cloud-based system, can also help to accurately record and track income and expenses.
- Misclassifying Workers: Misclassifying workers as independent contractors rather than employees can be a common tax mistake made by small business owners. While independent contractors may offer cost savings and flexibility to businesses, misclassifying employees as contractors can result in significant penalties and fines.The Internal Revenue Service (IRS) has set up rules for figuring out whether a worker is an employee or an independent contractor. Some of the things that might be taken into account are how much control the business has over the worker, how much the worker depends on the business for money, and how skilled the worker needs to be to do the job.Misclassifying workers can also have negative consequences for the workers themselves, as they may be denied access to certain benefits and protections that are available to employees.
- Forgetting to Claim Home Office Deductions: If a small business owner uses a portion of their home for business purposes, they may be eligible to claim a home office deduction on This deduction can be used to help pay for costs like utilities, insurance, and repairs that come with keeping and using a home office.To qualify for the home office deduction, the business owner must use the designated space in their home for business purposes all the time. This means that the area must be used for business purposes on a regular basis and cannot be used for personal purposes, which are especially vulnerable to tax mistakes.
- Missing US Tax Filing Deadlines: Failing to file tax returns on time can result in significant penalties and interest charges for small business owners. In the United States, the deadline for filing federal tax returns for most small businesses is April 15th of each year.
If a small business owner can’t file their taxes by the deadline, they can ask for more time to do so. However, it is important to note that an extension of time to file is not an extension of time to pay any taxes that are owed. If a small business owner knows he or she will owe taxes but doesn’t pay them by the original deadline, penalties and interest may be added to the unpaid balance.
- Missing Out On Carryovers: Small business owners may be eligible to carry over certain unused deductions and credits to future tax years. These carryovers can provide tax savings and help to offset the tax liability of the business.An example can be a net operating loss (NOL). A business has a net operating loss when its tax-deductible expenses are more than its income for the year. The NOL can be carried back to previous tax years to offset income and claim a refund, or it can be carried forward to future tax years to offset income in those years.
- Consulting the wrong CPA firm: Using the wrong tax professional can result in a variety of issues for small business owners. For example, a CPA firm that is not familiar with the specific tax laws and regulations that apply to small businesses may make mistakes that result in the business owner paying more in taxes than they are required to. Also, if a business owner hires a CPA firm that isn’t qualified or skilled, the Internal Revenue Service (IRS) might audit the business.To avoid these problems, small business owners should be careful to choose a experienced trusted partner like Konnect Consultancy that is qualified and has experience preparing tax returns for small to medium sized businesses. We have been helping small businesses get the most out of their tax returns, and we can help you with the same too. Contact us today to avoid making mistakes while filing the taxes of your small business.