Tax season only comes around once a year, but tax records are crucial all year long. The Internal Revenue Service (IRS) requires business owners to file returns and remit various business taxes. Reporting is often easier said than done. Even the most well-meaning, law-abiding entrepreneurs may unwittingly find themselves violating one tax code or another.
Properly filing returns can be a complicated process if you don’t fully grasp your business venture’s tax intricacies. New business owners commonly make a variety of tax mistakes.
Many startup owners overlook bookkeeping in the excitement of early sales or the hectic process of setting up shop. The failure to set up an initial accounting system can come back to bite during tax season. Business owners quickly realize they can’t file accurate returns without a proper record of business transactions.
For this reason, you may want to bring in an accounting professional while your business is still in its infancy. They can help you establish an organized recording system of all transactions manually or using a software system.
2. Ignoring Small Transactions:
You may feel some business expenses are too small to warrant tracking. Recording purchases like small stationery items or business lunches as expenses may seem unnecessary—until you face a tax audit. You want to produce a record of every business expense requested, along with its receipt.
3. Losing Receipts:
After you make purchases, especially of smaller items, it’s not unusual to misplace a receipt. Losing purchase records is less likely to happen if you have a file where these receipts are chronologically stored. Note that receipts contain valuable information, including transaction date, items purchased, and total dollars spent. Therefore, you need to have a readily accessible area dedicated to systematic receipt storage.
Alongside retaining documents, it’s a good idea to set up a computer or cloud system location where you store digital transaction copies. Scanning or taking a clear picture of receipts as soon as you receive them will ensure you’re able to maintain this digital receipt file.
4. Overlooking Estimated Taxes:
As a self-employed business owner—whether you register your business as a sole proprietorship, a partnership, or an S corporation—you may be required to pay estimated tax. The IRS generally requires this tax from anyone self-employed. They deduct income tax, self-employment tax, and any other applicable taxes from the estimated tax. The Form 1040-ES worksheet helps you work out what to remit in estimated taxes.
5. Not Leveraging Deductions:
As part of measures to stimulate business growth, the government classifies many business expenses as tax-deductible. Expenses like the purchase of manufacturing equipment, advertising, insurance, and some legal fees fall into this category. Proving you spent money on these items for your business allows you to spend less on taxes. However, many companies are not aware of these savings, spending more of their earnings on taxes than they should.
6. Doing it All On Your Own:
Business owners with no financial accounting background may accidentally commit mistakes and suffer the resultant penalties or spend more than they should on taxes. It is a wise idea to call in expert help from trained accountants so that you and your business entity remain fully compliant with IRS regulations.
A savvy accountant that offers tax accounting services can keep you IRS-compliant while helping you benefit from tax deductions. They also assist with establishing and maintaining your company’s accounting system. This system enables you to keep track of all your transactions and their supporting documentation. Taking this step helps with completing your taxes and keeping a leash on your expenses. You can also measure the profitability of your business continuously.
7. Starting on the Right Foot:
If you’re venturing into business, it’s vital to establish the right tax accounting foundation. Give your bookkeeping the attention it deserves from the start. Invest in a system to track every coin flowing in or out of your business and keep updated documentation. To make a good start, you can transform the way you create letters of engagement by using specialized software. If you have no training in professional accounting, let someone who does handle this for you. You will breathe easy come tax season.