TAXES & ACCOUNTING • February 25, 2016
2 minutes Read
It’s tax time again, and for small business owners, the stakes can be high. Not only must you make sure your returns are filed on time, but errors in your return can cost you a lot of money and potentially open you up to an audit.
Small business owners often make many of the same errors when it comes to filing taxes. This year, take care to avoid these four common tax mistakes.
1. Turning all responsibility over to your tax professional. Many small business owners hand off all their tax information to a CPA and “assume that because their taxes were done by a professional, that they have nothing to worry about,” says Maggie Mayer, CPA, owner of Mayer & Associates, an accounting firm in Madison, Connecticut. “You, as a business owner, not your tax preparer, are fully responsible for the information presented on the tax return.” Mayer recommends reviewing your return thoroughly, asking questions and making sure you feel fully comfortable with the information being presented on your tax return.
2. Not taking legitimate deductions. Some business owners let their fear of the IRS keep them from taking deductions, which leads them to pay more in taxes than they owe. “Every year I have to convince clients that it is ok to write certain things off that they are entitled to, because they are afraid they are going to get audited,” Mayer says. “If the deduction is valid, and you can substantiate it, you should take advantage of it.”
3. Not updating your business entity. Tax responsibilities are different based on your business entity — whether you operate as a sole proprietor, LLC or corporation. And the right entity for your business may change as your business changes. “So many business owners start out as whatever entity made sense when first starting their business, and never look back,” Mayer says. “The entity that worked for you when you first started your business is not necessarily the entity you should be set up as a few years down the road.” Filing as the wrong type of entity for your revenue level could cost you thousands more in taxes. Mayer recommends asking your tax advisor every year whether your entity identity is still working for your business.
4. Failing to keep good records. Even once you’ve completed the filing process, it isn’t really over. The IRS recommends keeping your tax records for at least seven years. Those records include any supporting documentation that could corroborate business income or deductions claimed. “Always make sure you can easily trace the amounts reported on your tax return to your bookkeeping records, then to the actual receipts,” Mayer says. “We highly recommend scanning all receipts to minimize the risk of them fading; many receipts are printed on thermal paper and fade over time.”
Photo Credit: Carolyn Franks/shutterstock.com
IMPORTANT INFORMATION: This is not investment, tax, or legal advice. Should you have questions, please consult your own attorney, tax accountant, or other appropriate expert having expertise in the area of your question or before making important decisions in these areas.