Posted by The TaxAdvocate Group, LLC

Common Tax Mistakes Entrepreneurs Might Make & How to Avoid Them

Common Tax Mistakes Entrepreneurs Might Make & How to Avoid Them

While starting up, many entrepreneurs usually concern themselves with various things like getting the perfect investor, getting funds, and hardly have tax in mind. However, the problem with waiting until the last minute is that it makes one prone to various tax mistakes. While such mistakes are not usually grievous, they could be an opportunity to lower your tax bills.

Here are simple mistakes to watch out for as you go about your business.


  1. Filing using the Wrong Legal Entity 

In the process of starting a company, many people do not think about the type of business entity they want for their business. However, getting it right with your business structure will affect your taxes and the amount you will pay. 

There are five categories for businesses in the United States:

  • Limited liability companies

  • S corporations

  • C corporations

  • Partnership

  • Sole proprietorships

Before 2017, many people assumed that filing as an LLC was the best choice for most businesses due to the significant tax advantages it holds. However, the introduction of TCJA in 2017 removed some of these benefits. Besides, while filing as an LLC has some advantages, one still has to deal with the tax reporting complexity.

Make sure to know what each business entity entails alongside the pros and cons before structuring your business. Then, it will avoid issues for you in the future. 


  1. Failure to Register in every state where you operate 

Many startups employ workers remotely, meaning they have a presence throughout various states. Unknown to many entrepreneurs, a presence in many states means they need to register in such states. 

Recently, even the Supreme Court affirmed that it is the legal obligation of a business to pay taxes in all states where it conducts business, even in the absence of properties or employees in such a state. So, as a result, if you shipped products in various states, you might have state tax obligations for those states. 

Business startups also need to file tax returns for all states with full-time employees, not contractors. As a result, you will need various tax forms if you have multiple freelancers working in different states. 


  1. Not Separating Personal and Business Finances 

It is a no-brainer for entrepreneurs to avoid mixing personal funds with business finances. In reality, however, it can be pretty tricky to keep both finances separate. For example, about 20% of all entrepreneurs reveal that they operate a single bank account for business and personal needs. 

The problem, in this case, is glaring – it is almost impossible to separate business-related expenses and deductions for taxes. When you cannot account for such costs, you will lose money to unclaimed tax deductions. Also, should there be a tax audit, you lose every form of legal protection available.

The solution here is obvious – having a separate financial account for your business from its inception to keep track of all business records. 


  1. Failure to Send 1099s

Many startups like considering contractors for major, if not every, part of their business operations. However, should any of these be paid above $600, you need to send them Form 1099 MISC and Uncle Sam a copy as well. 

Failure to issue a Form 1099 MISC could warrant a fine of $100 for all forms you failed to file. There is also a fine for missing deadlines and filing late, with the actual amount based on the return alongside your business size. 

With this, make sure all contractors and freelancers get Form 1099, or you have a severe tax bill waiting for you. 


  1. Failure to Deduct Business Expenses

For people running a startup without deducting business expenses, you are not taking the opportunity to reduce your tax bills. Ideally, a business can deduct all "ordinary and necessary" business expenses, alongside some significant deductions targeted at startups and small businesses.  

Startups can deduct things like bank fees, meals, expenses associated with training, home offices, research, developments, etc. There are so many deductions that make it essential to do your research well before tax time or work with a tax pro to maximize all deductions. 


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