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Filing your company tax return every year is something you must do. But you don’t want to make mistakes that could result in higher taxes than you actually owe, draw the IRS’s attention to your return, or cost you interest and penalties. Here are 20 small business mistakes to avoid:
Tax errors
1. Misreporting of income
Income may be reported to you (and to the IRS) through information returns, such as Form 1099-NEC if you are an independent contractor or Form 1099-K showing credit card and certain other transactions, regardless of your entity type (for example, sole proprietorship , Company C) if you have a certain amount of transactions. IRS computers see what you’re reported to, so it’s essential that they capture the information correctly. If the forms are wrong and you can’t get the sender to correct them, report the wrong amount with the appropriate adjustment, then attach an explanation to your return so you’re only taxed on the correct amount.
2. Not reporting income
If you trade goods and services, the transaction is taxable to you. This is the case whether you trade individually or through a swap exchange. Likewise, if you use virtual currency to pay or get paid for goods and services, you must also report the transactions appropriately. the The IRS is looking closely In virtual currency transactions.
3. Over-reporting income
If you sell inventory items, you must take into account the cost of goods sold so that you do not pay tax on gross receipts from sales. Your income is just the difference between what you get for an item and what it costs you (based on how your inventory is valued).
4. Not applying the meal discount limit
Only 50% of some work meals are deductible. Although wining and dining with a client or paying for your own meals while you’re out of town on business are legitimate business expenses, you can only deduct half the cost.
5. Confusing personal and business finances
If you don’t keep personal and business finances separate, it’s all too easy to overlook a business deduction or incorrectly treat personal income as business income. Maintain a separate business bank account and use a separate business credit card to ensure business income and expenses remain clear.
6. No mileage log
If you use your personal vehicle to drive for work, you must keep certain records. If you don’t, your discount for commercial driving will be lost. Record keeping requirements for this are in IRS Publication No. 463.
7. Thinking a Home Office deduction is a red flag for scrutiny
This is a common belief that should perhaps be dispelled. If you work from home and qualify for the home office deduction, accept it. Find information about the home office deduction from the IRS.
8. Tax mistakes from overlooking pre-opening expenses
If this is your first year in business, you may be able to get a deduction for startup costs you incurred before you opened your doors. This can be up to $5,000 in your first year, with excess costs reduced proportionately over 15 years. Special rules apply if total startup costs exceed $50,000.
9. Not benefiting from retirement plans
Contributions from qualified plans lower your current tax bill while saving for the future. There are many retirement plan options. For example, if you don’t have a plan yet, you can set up a SEP by the extended due date of your return and contribute to it during the year of that return. Furthermore, you may be eligible for a tax credit for starting the plan.
10. Failure to maintain basic records
Business losses passed on to partners and shareholders of an S corporation can only be claimed on their personal returns up to certain basic amounts. For example, an S corporation owner’s loss deduction is limited to the basis of inventory and loans he made to the company. Without these records, losses are lost. Likewise, the gain from the sale of business property is not the amount of proceeds received; It’s the difference between those returns and the basis in the property. The basis is usually the cost of acquiring the property, reduced by depreciation and increased by capital improvements.
11. Overlooking the deportees
Some business write-offs from prior years may have been limited at the time but are deductible now. Verify the carryover of net operating losses, capital losses, investment interest, home office deduction, and general business credit.
12. Not receiving thanks and appreciation for charitable contributions
If you donate $250 or more, you must have a written acknowledgment in order to receive a deduction. If you have not received one, request one before filing your return.
13. Paying underestimated taxes
If you are required to pay estimated taxes, be sure to take into account all taxes besides income tax. This includes self-employment tax if you are subject to it and additional Medicare taxes (0.9% tax on earned income and 3.8% on net investment income). You usually can’t wait until you file your tax return to pay taxes. Paying estimated taxes can result in a tax penalty.
14. Not claiming the qualified business income deduction
This personal deduction (also called the Section 199A deduction) for owners of pass-through entities is based on business income. It is not a business deduction, but it is a valuable way to reduce your tax liability.
15. Falsifying worker classification
Don’t evade your employer’s tax obligations by classifying employees as independent contractors when they are under your control. The IRS is constantly looking for this error, and it can cost you dearly.
16. Failure to submit the file on time
Pay attention to the application due date – April 15, 2024. If for any reason you cannot file on time, simply request an application extension. You do not have to provide a reason why you need more time to complete your return. Just make sure to file by the extended due date.
17. Failure to attach the required electoral forms, tables or data
Your return will not be complete unless you include all required paperwork. For example, if you rely on the IRS de minimis safe harbor to deduct capital items rather than capitalize them, you need to attach an election statement that references the safe harbor to make it valid.
18. Not understanding the differences in federal and state tax rules
Some tax breaks on federal returns are limited or prohibited for state income tax purposes. For example, a number of states have different rules when it comes to the Section 179 deduction and bonus depreciation.
19. Not keeping up with tax developments
Changes in tax law may qualify you for new tax breaks on your current return. They can even qualify you for a refund if you file an amended return. Find out what might apply to you and whether you want to apply for a refund.
20. Tax errors due to not disclosing everything to your CPA
Things happen, and the IRS may not allow deductions or change what you owe in taxes. It will also potentially impose an accuracy penalty that can only be avoided for reasonable cause. One way to do this is to show that you rely on a tax professional, but you must have disclosed all the relevant information to that person to have any chance of avoiding a penalty.
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