When the IRS looks at your tax forms, the tax agency uses a computer to compare what has been reported to it with what you have reported in terms of income. This is often carried out via 1099 forms — namely the 1099-MISC — which lists non-employee compensation.
There’s also the 1099R form, which pertains to income stemming from retirement accounts. Regardless of the forms or the source of your income, you must include all this information as part of your tax returns. Otherwise, you’ll find yourself in a situation where the IRS will be sending you notices for explanation of the discrepancy in the information it received.
Eight Business Tax Errors to Avoid
Let’s look at more business tax errors you should avoid if you want things to go smoothly with the IRS.
- Ensure that you send the proper forms to the appropriate IRS agencies.
As a business owner, you are required to submit various forms and respective payments to the IRS. For some business owners, this is true only on a federal level, but for others, documentation must be sent to state-level tax departments as well.
While some people are expected to file documents on behalf of their business on a quarterly basis, this might not be true for all business owners, so keep this in mind and look into the specifics of your situation so that you can comply with the IRS’ expectations of you.
- Try to submit quarterly payments to the IRS.
If you are filing as a self-employed individual, a sole proprietor, a partner or an S corporation, there’s a high likelihood that you’ll need to pay quarterly estimated taxes to the IRS based on what you expect your estimated tax bill will be at the end of the tax year.
The government expects you to make payments that are as close as possible to the exact amount of money you’ll owe, and while this can be tricky, you could otherwise end up facing a penalty for underestimating your total tax owed or underpaying along the way.
- Don’t misrepresent how much income you received.
Never lie to the IRS. If the tax agency has any suspicion that you were either negligent or unreasonably careless when reporting your income, you could face consequences. Also, if you substantially under-report the amount you owe in taxes, then you’ll likely be hit with a 20% penalty as a result.
- Always tell the truth to the best of your abilities.
Strive for accuracy when filing your taxes and be as scrupulously honest as possible. If the IRS believes you attempted — in any way — to intentionally defraud the agency, you could see fines as high as 75% of the money that you owe in the first place. You might also find yourself charged with criminal tax fraud as well, and that’s a serious crime.
- Don’t combine your personal and business finances.
Something you should certainly do — as it’s in your best interest to do so — is keep your business finances and personal finances entirely separate. Open different bank accounts for each category of money.
Use a business credit card when making purchases related to company purposes, and use a different card for anything you buy for personal reasons. Now, if you are planning to use any of your personal assets — such as your car or at-home office — for business reasons, it’s imperative that you maintain detailed records to support the deductions you take.
Make it a practice to not deduct something that you cannot prove via documentation. This will help you immensely in the event that the IRS pulls your tax return for an audit.
- Work on your taxes throughout the year, not all at once.
While many people view tax season as the weeks leading up to mid-April, business owners should view taxes as far more than a once-per-year proposition. If you end up leaving all your tax-related matters until the last minute, you’ll likely miss deductions you’re entitled to because you didn’t diligently keep track of your spending throughout the year.
- Keep a system that makes managing your finances easier.
In order to keep accounting fees down, find a way to track your income and expenses. Each month, you should reconcile your business cash and credit card accounts. There are several accounting software packages that can help you do this, such as QuickBooks or Sage.
Either way, when preparing your tax returns, a solid bookkeeping system that you maintained during the tax year for which you’re filing will make all the difference.
- Pay attention to business deductions all year long.
The IRS views deductions as purchases you have to make as part of running your business. However, not everything is a deduction.
To better understand what is — or is not — deductible from a business perspective and how to handle deductions when filing taxes, consult with your tax professional. Otherwise, you might end up taking deductions for items you should not classify as such, and this could open the door to an audit.
You might even find yourself in a situation where you’re facing severe monetary penalties if you claim deductions that the IRS does not approve of, so educating yourself is key. In fact, even the most legitimate of deductions can trip you up if they are not proportional to your income or profit margins.
If you report losses instead of profits to the IRS, the tax agency might end up declaring your venture a hobby rather than a business. In turn, you’ll be barred from claiming deductions altogether.
As you can see, there are many potential tax errors that business owners can make. Even when you’re doing your best to avoid tax-related mistakes, they can still happen. That’s why it’s wise to work with a tax professional who can help you with your tax-planning efforts.
Additional Resources:
IRS Guide to Business Expense Resources
