Bringing your dream business to life is a feeling like no other; however, it can also be a little overwhelming.
As a small business owner, your tax situation is probably more complex than it used to be—but if you take the right precautions, filing taxes doesn't have to be stressful. Here are a few common tax mistakes that small businesses make, and how you can avoid them.
There's no "one size fits all" approach when it comes to choosing the right business entity; however, if you haven't incorporated at all, you could be missing out on thousands of dollars in tax savings.
A Limited Liability Company (LLC) is a popular entity choice for small businesses because of its flexibility and relatively low cost. However, you should also consider the following factors:
For advice about which entity type is best for your specific situation, talk to a lawyer or tax professional.
Mixing personal and business finances.
Keeping your business and personal finances separate is important, as it’s a factor that the IRS uses to determine if your business losses and deductions are legitimate. This is especially critical to do when your business can be construed as a “fun” hobby like making videos, game development, or horse racing.
Some commingling of accounts is expected in the beginning when you don't have a business bank account yet, but you can't keep it up for the long run. Although it’s common for solopreneurs and new businesses to use personal credit cards while maintaining separate bank and payment processor accounts, transactions must be labeled clearly in your accounting system. There are several cloud accounting solutions available today that are easy to use for this purpose.
Good record keeping is the foundation of a healthy business that helps you avoid headaches at tax time.
Taking unlawful deductions.
As a small business owner, you have a host of incredible deductions at your disposal that add up fast. However, simply having receipts for certain purchases won't always suffice.
When it comes to deductions like meals, using your car, and business trips, it is important to keep detailed records of the business purpose for each expense, all meetings held, and mileage used. These large deductions often trigger tax audits because they are claimed incorrectly.
Common mistakes include deducting the cost of your spouse on a trip when they have no business purpose for being there, or claiming that a dream vacation was a business expense because you answered emails while abroad.
On another note, don’t forget to deduct the costs of your business insurance premiums from your taxes. Because the IRS considers your insurance premiums to be an essential cost of running your business, you can take this lawful deduction.
An accountant or CPA can help you determine which of your business expenses qualify for the available deductions.
Forgetting about your other tax obligations.
You may already be accustomed to filing personal income taxes annually in April, however as a small business owner, there other deadlines that you'll need to know. Depending on your business, you may be subject to a payroll tax, sales tax, quarterly self-employment tax, franchise tax, and more. It's important to understand your tax obligations and due dates in order to avoid late fees and other penalties.
An accountant or CPA can prepare your taxes for you, or advise you of the tax timelines that apply to your business. By avoiding these costly tax mistakes and seeking the guidance of a tax professional, you can decrease your risk of being audited and maximize your tax savings along the way.
This article contains general legal information and does not contain legal advice. Rocket Lawyer is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.
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28 November 2018 • 6-minute read
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*Harborway Insurance policies are underwritten by Spinnaker Insurance Company and reinsured by Munich Re, an A+ (Superior) rated reinsurance carrier by A.M. Best. Harborway Insurance is a trade name of Simply Business, Inc., which is a licensed insurance producer in all 50 states and the District of Columbia.