For many small business owners, taxes are a challenge because you have to find out what is tax-deductible. With so many things going on, it is very easy to make mistakes when filing your tax returns.
Here are the most common mistakes that most business owners make:
Deducting Startup Costs Improperly
When it comes to taxes, your startup costs will give you trouble. Many businesses usually assume that they can remove all their costs, but they cannot until they sell their first product. Any expense that your business incurs before you make your first sale is a startup cost.
Moreover, the costs cannot be deducted until you make your first sale and they have to be deducted over the next fifteen years. You should learn more about filing taxes if you are a new business owner.
Failing to Maximize the Medical Expense Reimbursement Plan
If you work with your spouse, you should claim her/him as an employee to avoid missing serious medical expense deductions. The medical expense reimbursement plan allows you to pay the medical expenses of your employees not covered by insurance tax-free. If you work with your spouse, your medical expenses will be tax-deductible.
If you are able to deduct the medical expenses of your family, you will find yourself saving the money when you have to pay for your own health costs. You should treat your spouse like an employee to avoid this tax problem. He/She does not have to work full time but there must be proof that he/she works there.
Mixing Business with Pleasure
Although it might seem easier to put your personal and business expenses together, it makes things complicated at tax time. To avoid this, you should not run your personal expenses, such as rent, clothing, and groceries through your business. When you do this, it will cause a red flag at the IRS and you do not need any extra attention from them.
Make sure that you have a different business account for the company finances. Moreover, you should resist the urge to use your business credit card to buy personal effects. If you have to use it for emergencies, you should not claim the purchases on your taxes.
Choosing the Incorrect Business Structure
As a small business owner, you should not make the mistake of filing as a C corporation because this will mean that your company will be taxed twice. A corporation’s profit is taxed when earned and then again, to the shareholders when shared as dividends – this means that you will be paying taxes twice. To avoid this, you should consider other tax-friendly business structures and choose them.
The most popular choice for small businesses is the S Corp because it allows you to pay taxes on your profits when paying your personal taxes, which means that you will pay less and pay once.
One of the biggest mistakes that your small business can make is paying taxes late. When you do this, the IRS will add a penalty of 0.5 to 1% per month, which can be a lot depending on how much you owe. The IRS computer usually adds this penalty when you file returns but fail to pay them on time.
You should know that the penalties for failing to pay payroll tax deposits on time are a lot higher. To avoid this mistake, you should pay your tax bill on time before the due date. If you cannot make the payment on time, you should contact the IRS ahead of time and set up a payment plan. This way, you will not pay hefty penalties.