Entrepreneurs, by their very nature, consider themselves a jack of all trades. Let’s face it, you have not gotten where you are today without being able to multitask. Not only have you assumed the role of receptionist and sales person, you have also been chief executive offer and chief financial officer. You are truly a do-it-yourselfer. You have only hired employees because you just do not have enough time to do everything anymore. For the most part, this has probably not been a bad thing. When it comes to your tax preparation, however, the IRS is singing a different tune. According to the IRS, 35% of the business returns filed by business owners contain avoidable mistakes. Because the IRS believes business owners are special, too, they have launched an audit program that specifically targets business owners. Juggling your business has just gotten harder because now you have one more concern to add to your plate.
Most errors on a business owner’s tax return are avoidable. Poor record keeping is the most common problem among business owners according to IRS, so pending the time doing a little more record keeping is probably in your best interest. When you start with poor records, you end up with a poor tax return. Learning what records to keep and how to keep them will also help to reduce mistakes. When it comes to record keeping, it is time to get out of the way of yourself and let over the counter software help you out. If you don’t understand accounting, however, it can end up being a computerized headache. This causes business owners to not only lose money by wasting their time running these accounting programs, but it also doesn’t give you accurate information as to whether or not the data you are putting in is accurate.
Another area of concern is not tracking all your expenses. When you go out and buy things for your business using your personal credit card or cash, you truly do believe you will remember the deduction at tax time. As business owners, you have so much on your plate that you forget the simple stuff. At the last minute, you find yourself guesstimating only to arrive at a number that is way off base. Guesstimating does not sit well with IRS as they are looking for exact numbers, so be sure that you are tracking all of your expenses.
Avoiding tax deductions is not a good idea. Some business owners make the mistake of avoiding certain tax deductions. When reviewing your tax return, the IRS will look for certain deductions based on where you physically operate your business and the type of business you have. Avoiding a tax deduction is a mistake not worth making because it draws attention to your return. The biggest fear of a business owner is triggering an audit or causing a red flag. This myth prevents business owners from taking a lot of the deductions they are entitled to take. For example, the home office deduction is one deduction business owners should take whether they have a brick and mortar office or a home office; many entrepreneurs work in both locations. In the 1990’s, this deduction was highly regarded as a deduction to avoid. Today, so many business owners work from home or in both their home office and their brick and mortar location, yet business owners either fail to take the deduction or they improperly take the deduction.
Another area of common mistakes is classifying expenses incorrectly. It is common practice for business owners to use independent contractors or virtual assistants to help them with projects and jobs throughout the year. According to the IRS, most business owners will classify these costs as labor costs or payroll costs. These costs are then deducted on the tax return as salaries and wages; this mistake is very costly. Any costs you classify as wages are subject to all the additional payroll taxes. This is an additional ten percent more than the original expense and is a great way for the IRS to collect more money in the form of penalties and interest.
If not taking deductions or poor record keeping is not enough of a blunder, then failing to pay your taxes on time will surely get you in trouble. Failing to pay taxes on time is one of the top 5 mistakes business owners make. They believe their tax payments are due when they file their tax returns on April 15th; thus, they fail to pay their taxes on time. Unfortunately, the tax system is a pay-as-you-go system and business owners are expected to make quarterly estimated tax payments. The due dates are April 15, June 15, September 15 and January 15 of the subsequent year. Not making these payments on time not only flags your return for audit but it also causes you to pay penalties and interest when you finally do file the tax return.
At the end of the day, entrepreneurs are pretty brave and savvy. Just like individual taxpayers, business owner are looking to cut costs yet they make the critical mistake of not seeking professional help. When it comes to your taxes the best way to cut costs is to seek professional advice. Business owners do not realize how much money they could save if they work with someone all year to keep accurate, detailed and up-to-date records. Business owners need a strategy to keep their business moving forward. They also need a tax strategy to make sure they are filing an accurate and detailed tax return that allows for them to use the tax code to lower their taxes. At the end of the day, it is not how much money you make that counts, it is how much you keep.