Now that the new year has officially arrived and things have gone back to normal after the holiday break, it’s time to start turning our attention to the 2013 tax season. The following post will help you to avoid some common mistakes made by small business owners and those classified as self-employed.
But first off, make sure to check out my earlier post: Free Online Tax Resources for Small Business Owners and the Self-Employed. Even if you will be handing over your business’ tax filing to an accountant or certified tax preparer, I still recommend that you check out these resources. Business taxation is one of those areas where it pays to at least have a basic understanding of what is going on. This includes any current (and upcoming) legislation affecting small companies and business-related pursuits.
9 Common Business Tax Filing Mistakes to Avoid
There’s no hiding the fact that small businesses owners and the self-employed have been increasingly under the gun to fully comply with tax legislation and reporting requirements. In order to bridge to so called “tax gap” (the amount of tax dollars actually collected versus what was legally owed to the government), the IRS has publicly announced that it is increasing its vigilance on this sector of the tax paying population.
If you want to increase your chances of avoiding an audit and of getting your return as quickly as possible, you need to make an extra effort to prevent some common reporting errors:
1. Not reporting all of your income. One of the biggest tax reporting changes of the past couple of years has been the crackdown on pre-tax income reporting. As I mentioned above, the IRS has been stepping up efforts to reel in all the lost revenue that comes as a result of the non-reporting or under-reporting of taxable income by small businesses and the self-employed in particular. Because of this, make it a point to keep for your records any Form 1099-K’s that you receive. The new form records payments received in 2012 by credit card or through third-party networks such as PayPal. Use them to complete your tax return and to verify income.
2. Not having supporting documentation. When you file a tax return, you will need to have documentation, such as bills and receipts, supporting your deductions. This includes charitable deductions which need to be accompanied by receipts showing the date, the amount given, and name of the organization. You should also have documentation to back up deductions you take for medical expenses, property taxes, mortgage interest and business expenses. Obviously, having the necessary backup documentation on hand is especially important if you will be claiming itemized deductions on your tax return.
3. Not keeping up with tax changes. The U.S. tax code is cumbersome and confusing, and to make matters worse, it just keeps changing. For this reason, you need to make an effort to know which tax legislation changes will affect you and your business. You can do this by consulting with a qualified tax professional and taking a look at some of those free tax recources I mentioned in my previous post.
4. Not taking full advantage of available deductions for small business owners. If you fail to claim a tax deduction that you qualify for, then you are literally leaving money on the table. To get the most accurate list of what you can and cannot claim on your return as a small business owner or a self-employed individual, it’s best to go to the source: The IRS’s web portal for small business owners and the self-employed.
5. But… don’t try to claim too much. There are many well-know red flags that the IRS is looking for when deciding who to audit. One such red flag is seeing larger than normal deductions for a taxpayer’s salary range. So, someone earning $35,000 a year who claims $17,000 in charitable deductions or someone who claims a lot of business expenses for a side business that earns little revenue is more likely to be flagged for an audit. Also, be careful about how you classify your employees. Don’t try to pass a permanent employee off as a contractual worker in order to capitalize on the significant tax difference between the two. If you do get audited, you’ll face some steep fines, penalties, and back-taxes.
6. Filing too quickly. Even if you really want to file your tax return as quickly as possible to get it over with, or you are expecting a significant refund and want to hasten the time it takes to get to you, one of the biggest mistakes you can make is to rush through the process. Those who rush to file their tax returns tend to make more errors, such as forgetting about estimated tax payments made earlier in the year, as well as things as basic as pulling the wrong number from a tax table. They also tend to miss out on tax savings, such as by claiming a standard tax deduction when they would be better off taking the time to make itemized deductions.
On the other hand, if you see that you need more time to file your taxes, then take it. Although the filing deadline is April 15, you can get more time to finish your tax forms if you need it by filing for an extension with Form 4868. Remember, if you owe a tax bill, you must send in that amount (or close to it) by April 15 or you could end up owing more in late-payment penalty charges.
7. Inaccurate information, miscalculations, and omissions. Many times the processing of a tax return is held up due to some small, inadvertent errors and omissions. Using tax software to file your return or the services of a qualified tax preparer can reduce the chances of making such mistakes. But, even these options are not foolproof; you should also make an effort to double check any information that you enter. Here is a list of some common miscalculations and omissions:
- Claiming the wrong filing status or number of exemptions- especially for nontraditional families, such as unmarried taxpayers living together with children from former relationships or parents living with their adult children.
- Entering an incorrect Social Security number and spelled names, especially for children claimed as dependents.
- Mistakes when figuring taxable income (make sure all your W-2s and 1099s are in your possession); withholding; estimated tax payments; Earned Income Tax Credit; Standard Deduction for age 65 or over or blind; the taxable amount of Social Security benefits; and the Child and Dependent Care Credit.
- Entering incorrect account numbers. If you are due a refund and requested direct deposit, review the routing and account numbers for your financial institution.
- Forgetting to sign the completed tax form.
8. Not checking for AMT. The Alternative Minimum Tax was created to ensure that high-income taxpayers pay some minimum amount of tax. Instead, it seems to have created an additional headache for many more households than was originally intended. Basically, you are going to need to calculate whether you owe AMT, which disallows some deductions and credits, and pay the higher of AMT or your normal tax liability. The IRS will do this when they get your return, and if you pick the wrong one, they will come after you for the balance, suddenly turning your tax refund into a tax bill!
9. Not seeking the advice and assistance of a tax professional. Being frugal does not mean skimping in areas where expenses are necessary. Seeking the assistance of a qualified tax professional is in many cases a necessary expense if you are running a small business. A tax professional can help you avoid costly tax errors, should know about recent tax law changes, and can assist in you in your long-term tax planning. All of this can pay for the professional fees many times over. For more information on how an accountant can help your small business, see my earlier post.
For more tax tips and information, you can check out Tax Law Changes and Tips for 2012 Filing Season at USA.gov.