When tax day rolls around every April, businesses across the United States realize they may have forgotten a few things they should have tracked or done during the previous year. The average entrepreneur pays quite a bit of their revenue in taxes but can also get into hot water if they fail to pay estimated taxes and suddenly realize they have a huge burden.
On tax day, you’ll want to ensure you don’t make any common errors that might trigger an audit. Basics such as spelling your name correctly, using the right Social Security or EIN, and avoiding math errors are easy things to focus on when filing. However, there are a slew of other problems that build over time and should be addressed throughout the year.
Understanding other business owners’ common mistakes helps you avoid the same issues. Here are the most likely missteps.
1. Procrastinating
The United States and local governments collected approximately $504.39 billion in taxes during the third quarter of 2023. It takes hours of work to file a business tax return, even if you’re filing on your personal income tax as a sole proprietor. Paying estimated taxes quarterly is just one example of what you must keep up with all year. If you procrastinate until the last minute, you’ll likely have trouble finding time to add all your receipts and may incur fines for not paying promptly.
2. Keeping Poor Records
You must keep detailed records to feel confident on tax day. There is always a chance you’ll be subject to an audit. However, if you’ve kept receipts and detailed notes about the legal deductions you claimed, you’ll be able to answer any questions the Internal Revenue Service (IRS) has and avoid penalties.
If you have a home office or use your personal vehicle for business purposes, you’ll also want to keep track of your overall expenses and the percentage of time or space where you use those assets for your company.
The simplest way to keep track is on a spreadsheet. Some software figures the percentages and formulas so you don’t have to. It may be worth investing in business software such as Quickbooks or Freshbooks.
3. Not Ensuring Health Care Compliance
You’ll need to comply with the Affordable Care Act and provide proper documentation to employees if more than 50 people work for you. Use a checklist to ensure you don’t miss any end-of-year procedures you should follow.
The document preparation you work on for your staff requires analysis after the tax year ends. It’s also a good time to prepare for next year’s open enrollment. Gather feedback from workers and make any needed changes to give them the best coverage you can afford.
4. Failing to Claim Deductions
A huge mistake some companies make on tax day is failing to claim deductions. You might be worried about triggering an IRS audit and not claim legitimate travel or meals.
However, if the expense is legitimate, you should claim it and be ready to provide documentation as needed. Keep notes about why the dinner was a business expense, such as taking out a new client to discuss the potential for a long-term contract or traveling to a convention in another state.
Remember that you can combine a family vacation with business travel. However, tax experts strongly recommend separating your expenses. You cannot claim the cost of adding other people into the equation or personal side trips you take.
How does a business/pleasure trip work for tax purposes? John Businessperson sees there is a conference in his industry in Las Vegas in February. His spouse has some time off and wants to tag along. John’s hotel is deductible, but the place charges another $20 to add a person. He should not deduct the $20. The conference fee is $250 and is deductible. Meals John eats during the conference are deductible, but not what his wife eats, so her bill should be paid separately. The conference runs for three days but they stay five, so the additional days shouldn’t be listed as an expense.
You should consult with your tax professional to be certain what is allowable for your industry. However, you can see how it works to take someone along and still claim your portion of the deduction.
5. Forgetting to Add Income
Around 62% of people think owning a business is a smart career choice. While trying something new is risky, there are many rewards, including deducting the costs of starting a business. However, one area where people get into trouble is forgetting to add income.
A freelancer might get a cash payment for a project and not record it. Some people also mistakenly believe if they make under $600, they don’t have to claim the amount on their taxes. The rule is that companies don’t have to issue a 1099-MISC if the amount they paid the company or freelancer was under $600. However, you are responsible for claiming what you made whether you get a 1099 form or not.
You might sell off an asset and forget to list the income from the sale. In most cases, you’ll sell used items for less than you paid or will donate them, thus making the point moot. However, if you do make money, you must claim the profit. This is particularly true for people who work in the resale industry.
6. Missing Tax Breaks
How can you determine which business deductions to take, such as parts of your home? The IRS has a handy chart that helps you determine if the expense is allowable. Each question in the chart is a yes or no. At the end, you’ll be informed if the deduction is permitted.
Tax preparation software will only ask about common scenarios. Consider hiring a tax professional for the most extensive review possible.
7. Ignoring Changing Tax Laws
Another mistake some business owners make is ignoring tax laws. Changes happen each year, including to the tax tables. Pay attention to the laws coming down the pipeline that might impact your company.
One big change is that cash apps and online payment portals are now required to send in details about any transaction, not just those over a certain amount. While the change isn’t a new law, those not claiming all income may panic over the thought. Also, hobby sellers who might not realize they have to declare income and need to track expenses could owe a lot of money at the end of the tax year.
Take the time to read widely about tax laws and small businesses. Consult with your local Small Business Administration branch — many have retired tax professional volunteers who will help walk you through tough issues. Be proactive in expanding your tax knowledge.
8. Not Seeking Help When Needed
The IRS assessed about $4 billion in business income taxes in 2022. While the number varies from year to year, the government is looking for people trying to cheat the system. Unfortunately, you could make an honest mistake without intending to and still be assessed penalties.
The time and cost to appeal an IRS decision is significant. If you aren’t sure how to file something, take the time to consult with a professional tax person. You may not have the funds to pay a full-time CPA, but you can pay for an hour of their time to review the issues you’re uncertain about or your return in general.
While you can hire companies to help you fight amounts the IRS says you owe, if you did make a mistake and owe the money, you’ll have to pay it in some fashion. It’s better to avoid errors in the first place rather than letting them compound.
Ask for help when needed, hire a professional or go to the SBA office and get help from retired bookkeepers.
Take a Breath on Tax Day
You might feel the weight of the world on your shoulders when tax day rolls around. You likely have a huge bill due if you fail to pay estimated taxes and may feel the added anxiety of finding time to add everything up. It’s far better to do the work throughout the year and try to get your tax burden down before April rolls around.
However, if you did procrastinate or fail to keep records, you can still recover. Go back through bank and credit card statements to gather income and expenses. Check accounts such as Amazon, PayPal and other payment sites to create a paper trail. It will take more time and attention to detail, but you can still file a return that keeps your business honest and afloat.