When it comes to small businesses and taxes, complexity and confusion are quite often the first words that come to mind. We asked CPA Stephanie Sand, a partner with Stewart Archibald & Barney, LLP, in Las Vegas, to enumerate the most common tax mistakes she encounters with her small business clients, and how to avoid them.

“Not knowing all of the taxes you are supposed to pay.” All businesses know they must pay taxes to the IRS, but not all businesses are aware of the myriad of other taxes that may also apply to their company, observes Ms. Sand. For example, in addition to corporate or sole proprietor federal income taxes, your business may be subject to state income taxes, sales tax, property tax, payroll taxes, local taxes, excise taxes, self-employment tax and other specialty taxes. Depending upon the state you live in, these taxes can be just as extensive as the federal tax. Ms. Sand suggests going to your state’s Department of Revenue's website to determine which taxes are relevant to your business.

“Trying to do everything yourself.” Sand knows that many small business owners are not significantly capitalized when they first start out, and often try to save money by doing as much as possible in-house. “I have seen many businesses give us their QuickBooks for their annual accounting, and we have spent hours trying to fix the errors they made in order to prepare an appropriate tax return,” she points out. Payroll is another example of an area where businesses are prone to make mistakes when they try to do it themselves. Sand’s firm always recommends that their clients outsource their payroll. “Payroll companies know the taxes that need to be paid and the timing of those payments,” Sand advises. “Use the experts who are good in their fields, rather than trying to do it all yourself, and It will save you and your business money in the long run.”

“Not taking legitimate deductions.” Sometimes businesses owners are afraid of the IRS and are reluctant to take legitimate deductions, resulting in an increased income tax burden. Sand believes that every company should take full advantage of any tax deductions to which their business entity is entitled. “If the deduction can be substantiated, you should take advantage of it,” she emphasizes, adding, “The home office is one of these deductions. With technology today, the IRS understands that many small businesses are operated from home.” If you legitimately have a home office, talk to your tax preparer to ensure that you are benefiting from all allowable deductions.

“Failing to make estimated tax payments.” Many business owners are required to pay estimated taxes on a monthly or quarterly basis to avoid being assessed penalties by the IRS. The amount varies from year to year and is dependent upon the income for that taxable year. Thus, it can be very difficult to figure out how much to pay each period. “I recommend meeting with your tax preparer once, but optimally twice, each year,” Sand advocates. She suggests having the first meeting around mid-year to determine what the estimated tax liability may be, and if any tax-saving strategies can be implemented. A second meeting later on will ensure a final look at the profit of the company right before year-end, so the client can make sure they have paid in enough taxes to avoid any penalty.

“Mixing business with personal.” While it may not seem like a big deal to mix your business with your personal accounts, the IRS would 100% disagree with you, Sand warns. Bookkeepers often spend hours trying to separate business and personal expenses on the books of small businesses. Only legitimate business expenses are allowed as deductions by the IRS. “You can deduct a trip that you took for a business seminar, but paying for a nanny to watch your children while you are gone is a personal expense, not a business one.”

“Keeping your records up-to-date.” It is very common for small business owners to put off keeping track of their accounting records. “They are just too busy working in their business and have no time to work on their business,” observes Sand. This can lead to missed opportunities for reducing that year’s taxable income. She urges businesses to reconcile bank accounts monthly, and retain receipts to support expenses and deposit slips to support income. Credit card statements should be entered monthly and also supported with receipts. “This is a large area that we see business owners get behind in. They pay for expenses on their credit card and forget to keep the receipts, even though the IRS does require them,” she concludes.

There is no doubt that tax and accounting regulations and requirements can be daunting for a small business, but if you follow advice from someone like CPA Stephanie Sand, you can relax at tax time, knowing that you have a professional on your team.

 


The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.