By Caron Beesley, Contributor
Tax time brings with it a sense of urgency and pressure, and mistakes inevitably follow. Tax deductions go unclaimed, paper trails go awry and costly surprises can result.
Here are eight of the most common tax preparation mistakes that small businesses make, plus some tips for mitigating them.
Start a business last year? Write off the expenses
New business owners can write off the expense they incurred before technically opening their doors for business. Don’t overlook this important deduction. Read more in How to Write Off the Expense of Starting your Business.
A lot of confusion exists about what constitutes a legitimate business driving deduction. SBA guest blogger Barbara Weltman clears the air in her blog “Driving for Business.” What is business driving? “When you travel from your office to see a customer or vendor, this constitutes business driving. Whether travel from your home to another location is a business trip depends. If you commute from home to your office (and back), this is a nondeductible personal expense. If, however, you work from a home office for which you claim a tax deduction, then travel from home to any business location (and back) is treated as deductible business driving.”
The mileage deduction for tax year 2014 is 56 cents per mile.
Another big mistake that business owners make is to limit their deductions to mileage. If you can prove that they are business expenses, you can also deduct other costs including gas and oil, tires, insurance, lease payments, tolls and parking fees. Read more.
Don’t forget the small stuff
Petty cash purchases, magazine subscriptions, educational classes and more. These “small” expenses can add up quickly. Make sure you track all your expenses and check with your tax advisor about what you can and can’t deduct.
Don’t exaggerate your deductions
Your accountant can ensure you don’t overdo or exaggerate your deductions – something that can raise the possibility of an IRS audit. For example, many small business owners mistakenly assume that they can deduct 100% of meal costs while traveling or client gifts. They are actually only partly deductible.
Likewise, if your expenses are a lot higher this year than last or not considered typical for your industry or business type, the IRS may get inquisitive.
It’s not all about the IRS
The IRS is only one piece of the tax pie; don’t forget about your other tax obligations – property, payroll, local taxes, excise tax, self-employment taxes, etc. These can all come back to bite you if you aren’t compliant in a timely manner.
Separate personal and business
Intermingling your personal and business bank accounts is a big cause of confusion around tax time, making it hard to track income and expenses. Furthermore, if you operate a home business, make sure you keep that space distinct and separate from the rest of the home so that you can correctly claim the home office deduction.
Avoid payroll mistakes
Payroll tax compliance is something that many small business owners struggle with. The financial consequences of getting it wrong aren’t pleasant either. Statistics show that approximately 40 percent of small businesses incur an average of $845 per year in IRS penalties. To make sure that your payroll taxes are deposited correctly, outsource your payroll function to a payroll company. The benefits often far outweigh the fees. Read more about the five payroll tax mistakes to avoid from Barbara Weltman.
Keep your records up-to-date
This is a common problem for small businesses and often leads to missed opportunities for reducing your taxable income for the year. Make sure your expenses are reconciled, tracked and supported with receipts (the IRS requires it). Spend time each week to review your accounts – receivable, payable, credit card transactions, cash flow, etc. if your business is growing, consider accounting software (which synchronizes all your financial transactions and activities in one centralized dashboard) or retain the services of an accountant.