As a small business owner, nothing says party like doing the books right? Still, ensuring that you’re representing your business appropriately to the IRS is a big issue. Consider this: American gangster, Al Capone skated on murder and robbery, but he couldn’t beat the charge on tax evasion.
If you want to avoid the taxman it’s important to maintain good financial habits. Here we’ve outlined some of the worst financial habits of small business owners – avoid falling into these traps.
1. Failing to claim all of your expenses.
If you’re paying out of pocket for client dinners, sales gimmicks, office supplies, or office space – you can deduct those charges, but only with a paper trail. If you fail to keep track of business expenses you’re essentially paying for them twice instead of getting the tax relief available to you.
Sometimes business owners shy away from reporting expenses, because excessive deductions can be a red flag for audits. Still, having some idea of the cost outlays you’ve had over the year is an important metric to place against your profit and sales goals. Even if you only take a portion of expenses for a deduction, that’s money back into your pocket. Keeping track of expenses no matter how you make the cost up is also part of a strong cash management practice.
2. Relying solely on Turbo Tax instead of tax experts.
Most large enterprises have a tax strategy in place. This strategy includes an audit of current business lines and processes to ensure they aren’t paying more taxes than they owe. A good tax strategy can also ensure that you’re receiving all of the business tax credits and rebates available to you. TurboTax or other tax filing software is great when you only have a straightforward filing in one state. If you’re running a more complex business or an aggressive growth strategy you will want to bring in experts: a tax attorney and a tax accountant.
Tax rules change on an annual basis. Allowances expire, requirements change, and the IRS isn’t about to send you a note when they change. So, it pays to endure the upfront cost of bringing on tax experts in lieu of getting hit with additional taxes or penalties later on. At the end of 2013 alone, over 60 tax rules expired or were changed. Do you have time to keep up with that on your own? Most likely not.
3. Failing to declare all of your income.
If you take part of your income in cash as a matter of practice, or, that’s just how it happened this year, you need to make sure you declare all of it, even if no one else reports it on a W-9. This also includes income you may have gotten illegally. The IRS generally considers any sort of income taxable, so if you eventually spent it or used it this year, you probably owe on it.
Cash income goes underreported every year and the IRS expects that, so if you run a business like salon services, food or other entertainment that is largely a cash business you can expect to see greater scrutiny for underreporting. Bite the bullet and pay now, instead of facing penalties and potentially criminal charges later on.
4. Not claiming theft or bad debts.
Most businesses keep an internal report on what they call “shrinkage”. This accounts for shoplifters, bad shipments, or other items you may use that are part of inventory as a part of running a business. When you file your taxes, you may be eligible for tax relief from these losses.
This is also true for bad debts, as we’ve covered before, if you keep records of bad debts from customers or clients you can deduct those losses. If you’re worried about triggering an audit by declaring these losses, as long as you have a paper trail, they may be disallowed, but in many cases the IRS asks first before wanting to see the whole picture.
5. Ignoring IRS questions or administrative updates.
If you want to show that you’re acting in good faith, cooperation is always key. If you blow off questions or fail to provide up-to-date business information to the IRS that can be a red flag. Even if you’re doing nothing wrong, it’s much more likely the IRS will start asking questions when your business operations become more opaque.
Often, the IRS will send you a notice and its benign or they’ve made an error that you can resolve in your favor simply by providing a complete and timely response. Why throw money away on penalties and interest you wouldn’t have to pay if you’d just responded on time.
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