Ugh. Yup, it’s that time of year again. Tax time!
No one, not even small businesses, want to pay more taxes than they have to. Smart taxpayers prep themselves with valuable knowledge so that they can cut their tax bill down as low as it will go. They think about their taxes not only when they are preparing them, but all throughout the year.
It’s not too late for you though to turn your tax cart around and lower your yearly tax expenses. One course of action would be to avoid the following common mistakes.
Pile on the deductions, the legitimate ones!
Many business owners let the fear of the IRS keep them from taking deductions, which can lead to them paying more out to the IRS. If the deduction is valid, and you can substantiate it, you should by all means take advantage of it.
Of course, the same rings true for the frivolous unsubstantiated deductions. If you feel that they are shady and not valid right offs, then the safe course of action is to omit them.
This includes start up costs. CPA Gail Rosen says startup costs often give new small businesses trouble when it comes to taxes. “Many small businesses assume they can deduct all of their costs in starting a new business but they cannot until they have their first sale,” she says.
Expenses your business incurs before your first sale are considered startup costs (such as computers, equipment, office space, etc). These costs cannot be deducted until you have reeled in that first sale, and then they are deducted over the course of 15 years.
You can, however, elect to deduct the first $5,000 in your first year of business for startup costs, and another $5,000 in organizational costs (think: costs for setting your business up as a corporation, legal fees, etc.) — but you can only deduct these if your total startup costs were $50,000 or less. If your costs were over $55,000, you don’t even get that initial $5,000 deduction at all.
Mixing business with pleasure.
This is probably the hardest and most easily made mistake small business owners make (myself included). Anil Melwani, a CPA at 212 Tax & Accounting Services, says he’s seen many business owners running expenses through their business that are clearly personal, such as home rent, pet expenses, groceries, clothing, and personal items.
This of course will raise up a red flag to the IRS, causing unnecessary attention to come your way.
The best way to avoid this pitfall is to simply keep business and personal expenses separate. Have separate accounts for each and resist the urge to use your business card for personal expenses – no matter how mundane the expense may seem. Believe me, it’s a slippery slope.
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.
Yes, that means file boxes that crowd your garage or office closet. Just label them clearly and pack them away. Better to be safe than sorry if the IRS agent should come a’knockin.
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.