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Filing your tax return as an ordinary citizen is already no fun. But as the owner of a small business, tax time only gets more stressful. Filing your business’s taxes is a very thorough process. It’s one that could provide welcome refunds, but it’s also a minefield where one false move could invite the scrutiny of the IRS. The mistakes small business owners make when filing taxes can leave money on the table, cost money that they could have saved, or, in the worst-case scenario, lead to a dreaded IRS audit. Here are a few of those mistakes and how you, as a small business owner, can avoid them.
Misreporting of Income
You may have heard the adage that a good attorney never asks a question they don’t already know the answer to. Assume that the IRS asks its questions of you the same way. Overreporting or underreporting your income—especially underreporting yourself into a lower tax bracket—is a mistake that will most likely catch up with you down the road. Be transparent in your tax filings for better or worse to avoid the dire consequences for dishonesty.
Not Setting up an SEP Plan
While the tax code forbids outright dishonesty, it does allow for strategic allocations of revenue. Today’s tax breaks in concert with tomorrow’s retirement savings are tough to pass up. The Simplified Employee Pension Plan allows sole proprietorships and small businesses with limited employees to set up traditional individual retirement accounts for themselves and their employees. Under an SEP, a business can contribute up to 25 percent of its annual income for future savings—and future taxation, too. This tax deferral can be a good bet for you, and these pre-tax employer contributions can provide a great benefit at tax time while building for the future.
Home Office Abuse
In an era where more people are working from home than ever, it’s tempting to make the most of the IRS’s home office deduction. However, the increased prevalence of working from home has come with increased scrutiny for what constitutes a home office. If you don’t have dedicated square footage that you use for a primary workplace and nothing else, you risk losing your deduction and winding up on the wrong side of the taxman’s ledger.
Mixing Business and Pleasure
Owning a small business feels real once you whip out your first company credit card with its name embossed on the surface. Just be careful how you deploy it. Playing fast and loose with what constitutes a business lunch and what goes on the company card leads to one of the biggest mistakes small business owners make when filing taxes. Avoid eliding the difference between business expenses and personal expenses to make tax time simpler, less stressful, and less dangerous.