Posted by Income Taxes and Bookkeeping LLC

Top Tax Mistakes Small Business Makes

Top Tax Mistakes Small Business Makes

All small businesses must file their tax each year. However, it is essential to avoid mistakes that can lead to higher taxes or raise unnecessary questions. 

This article sheds light on the top mistakes to avoid:

  1. Misreporting Income 

You will report your income to Uncle Sam using Form 1099-MISC. Independent contractors will use Form 1099-K. This information is available to Uncle Sam which makes it necessary to report every income you got correctly. If you got the wrong forms and could not get the person that sent it to you for amendment, you will have to report the wrong amount with an explanation so that Uncle Sam will only tax the correct one. 

  1. Not Reporting Income

For all business transactions that you had on barter, the transaction is taxable. It is essential even if you trade one on one or use a barter exchange. Similarly, using virtual currency to pay or get paid also requires you to report such transactions. 

  1. Excessive Reporting of Income

For people that sell inventory items, it is essential to include the costs of goods you sold to avoid paying taxes on the gross receipts that will come from the sale. Your income amount will be the difference between the amount gotten for the commodity and the cost. 

  1. Not Including the Limitation on Meals Deduction

Only half of some business meals can be deducted. While entertaining a customer or paying for your meals even on a business trip out of town, one can only deduct 50%.

  1. Combining Personal and Business Expenses 

Not separating these will make it easy to miss business deductions or even treat personal income as business income. You need a particular bank account for business alongside another one for your business credit card to help separate your business income and expenses.

  1. Failure to have a Mileage Record

You need to keep some records if you use your car for business purposes. Not keeping such records will make you forfeit your business driving deductions. You can get more information in IRS Pub 463

  1. Underpaying Your Estimated Taxes

For businesses that have to pay estimated taxes, make sure to account for all taxes from income. This includes additional Medicare taxes (0.9%), self-employment tax for businesses subjected to it. It is not advisable to wait until you file your tax to pay your taxes. You might get a penalty if you underpay your estimated taxes.

  1. Avoiding Retirement Plans

All contributions to a qualified plan will reduce your tax bill to save it for the future. Retirement plans come in various forms. It is possible for people without a plan to set up a SEP when your return is due and pay into the account for the year. Starting such a plan might even qualify you for a tax credit.

  1. Avoiding Carryovers 

There are business write-offs from the past year, which could be small then but presently deductible. Watch out for the following carryover: investment interest, net operating losses, general business credit and the home office deductions. 

  1. Not Keeping Simple Records

It is possible to claim all losses from businesses that are transferred to partners and shareholders in an S Corp on their return up to some basic amount. If such records are not available, losses will be unavailable. In the same way, all gains from the sale of the business property will not be the amount from proceeds gotten; rather, it will be the difference between the proceeds and the property basis. The basis is defined as the cost to acquire properties increased by the available capital improvement and reduced by the depreciation. 

  1. Not Filing on Time

Make sure you are aware of the due date for filing. One can ask for an extension if filing on that date will not be possible. You are under no obligation to let them know why you need more time for the return. Simply make sure to file by the extended due date.


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