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Three biggest mistakes that small business owners make when filing their tax return

Three Biggest mistakes that small business owners make when filing their tax return

As a small business owner, your attention is often divided among numerous responsibilities such as marketing, recruitment, customer service, and daily operations. Consequently, it is not uncommon for tax-related matters to be neglected. Nevertheless, as tax season approaches, it is imperative to redirect your focus towards this crucial, albeit potentially unpleasant, aspect. Prior to delving into the intricacies of tax preparation, our team of proficient small business accountants in Raleigh is here to enlighten you on the prevalent errors frequently committed by small business owners during this process. By heeding our advice, you can mitigate your tax liability and minimize the likelihood of an audit.

 

1. Over-Reporting or Under-Reporting Income

One of the methods employed by small business proprietors to inflate their reported income is the inclusion of sales tax in their income reporting. However, it is imperative to note that sales tax should not be considered as part of the income, thus necessitating the deduction of any sales tax paid throughout the year from the total income. Conversely, under-reporting is a prevalent and financially burdensome error. For instance, if a small business owner sells business equipment that is no longer required, such as furniture or a computer, it is essential to acknowledge and include the proceeds from such sales as income on their tax returns.

Consequences of Under-Reporting

Individuals and companies found to be under reporting their financial information may be subject to fiscal penalties, and in severe cases, may even face criminal charges. However, it is crucial to bear in mind that under reporting is considered a criminal offense only when the offenders intentionally disregard the tax code. In cases where under reporting is a result of negligence or calculation errors, the Internal Revenue Service (IRS) has the authority to impose penalties on the under reporting entity or individual without initiating criminal proceedings against them. For instance, if a waitress absentmindedly places a few bills in her back pocket instead of including them with the rest of her earnings, this act of negligence is unlikely to lead to criminal punishment. Only if investigators determine that the waitress has willfully engaged in tax evasion or fraud will she be at risk of being convicted of a felony.

 

2. Not Filing On Time

As a small business proprietor operating as a sole proprietor, partner, LLC, or S-corporation shareholder, it is advisable to remit quarterly estimated taxes, particularly if you anticipate owing over $1,000 when filing your return. Failure to do so may result in a substantial tax liability that may prove challenging to settle. Furthermore, timely payment is crucial to avoid penalties and fines. It is recommended that you adhere to the tax deadline schedule to prevent such occurrences.
 

3. Mixing Business and Personal Finances 

If your business operates as a corporation, it is recognized as an independent entity, necessitating the complete segregation of finances to uphold the corporate shield that safeguards personal assets. Conversely, if your business is structured as a sole proprietorship, it lacks separate entity status, entitling you to all profits while also holding you accountable for all debts, losses, and liabilities. Nevertheless, it is advisable to maintain a clear distinction between business and personal finances, as in the event of an audit, the onus falls upon you to substantiate your business expenses and income.

Maintaining a clear demarcation between your business and personal expenditures holds significant importance. This can be effectively achieved by establishing distinct banking and credit card accounts exclusively for your business. It is advisable to consistently employ your designated business credit card solely for business-related expenses. Even in cases where personal and business items are procured from the same office supply store, it is prudent to employ separate credit cards for each transaction, thereby ensuring the segregation of these expenses.

 

Contact us today at Profit Wise to get started! Call us at 256-489-1478 or schedule a consultation here. 

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