Planning, preparing and filing business taxes can prove to be a chaotic, stressful and confusing ordeal for many small businesses.
Due to a variety of tax-related issues your company may face it is critical to seek out expertise. According to Outright.com in a recent post, “Businesses [should] turn to either a professional accountant or tax attorney for help… Forming a working relationship with a tax pro can keep you out of hot water with the IRS and take some of the stress off of tax time.”
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Locating and hiring a qualified tax specialist is just the beginning. Former IRS Revenue Officer and Landmark Tax Group founder, Michael Raanan suggests that “due to the substantial increase in IRS audits, business taxpayers should take precautionary steps when filing their taxes this year to help reduce their chance of an audit.” Raanan recommends:
1. Beware of your deductions.
2. Claim proper exemptions.
3. Ensure all your tax filings reconcile.
4. Document any questionable information.
5. File on time.
However, the risk of facing a potential IRS audit is merely one of many hurdles that small business owners are tasked with addressing each year. So, we asked fifteen of the nation’s leading CPA’s, tax attorneys and tax analysts to shed light on common tax mistakes you should avoid:
Mistake #1: Ignore opportunities to offset current losses.
“Most small business owners do not understand the power of utilizing Net Operating Losses (NOLs). If your company is in a net loss position at any point in the year, and the business or the pass through shareholder has paid taxes in the previous two tax years, you can file for an emergency refund (e.g. you do not have to wait until tax time to get a refund to shore up cash flow needs).”
– Michael J. Fitzgerald, CPA/PFS/MTAX, President at Fitzgerald Financial Partners, LLC
Mistake #2: Remain uninformed of filing requirements and due dates.
“Many small business owners don’t know the filing requirements or due dates of required returns. Often there [are more requirements and documents to be filed alongside your] corporate return. There are also payroll taxes, personal property taxes, sales taxes, and excise tax returns. Also penalties for late filing, incorrect calculations, or non-filing can be substantial.”
– Cheryl L. Yarbrough, CPA, Practice Leader, Business Services at Windham Brannon
Mistake #3: Unfamiliar with tax rate changes.
“Income tax rates for higher income individuals went up on Jan. 1, 2013. This is relevant because most multi-owner small businesses are taxed as partnerships, LLCs, or S corporations where results of operations are passed through and taxed to the individual owners, partners or shareholders. With this in mind, it may be good idea to pull income into 2012, where it is taxed at lower rate than would be in 2013.”
– Jim Keller, Senior Tax Analyst at Thomson Reuters
Mistake #4: Fail to consistently perform bookkeeping tasks during the year.
“Most small business owners are so overwhelmed with running the day-to-day operations of their business, that they habitually postpone recording their daily, weekly, monthly, and yearly transactions… As a result, tax time turns into chaos, with boxes of receipts, invoices, and checks flying all over the room. The solution: set aside a few hours each week to organize your company’s financial transactions. If a few hours won’t cut it, consider trusting a competent CPA to manage your company’s financial and tax life.”
– Dave M. Finklang, CPA/CGMA, Senior Tax Associate at Brown Smith Wallace
Mistake #5: Fail to consult a tax specialist prior to making major financial decisions.
“[Many entrepreneurs don’t] reach out to a qualified CPA or tax professional before making major financial decisions, including making the correct entity selection at the outset, failing to draw a salary and using company accounts and funds for personal use and expenses. These mistakes can lead to serious consequences on the business owners’ tax positions. In some cases, they may even strip owners of the liability protection under which they think they are operating.”
– Eddy Mathieu, CPA, EA., Owner at Mathieu Accounting & Tax Services, LLC
Mistake #6: Don’t take full advantage of employee benefits arrangements.
“Retirement plans can benefit both employees and the employer, providing significant opportunities to reduce current year taxable income and save for the future in a tax deferred plan. Likewise, Section 125 cafeteria plans allow employees the opportunity to pay for benefits such as medical care, life and disability insurance, and child care using pre-tax dollars. Although most small business owners, as “self-employed individuals,” are not eligible to participate in cafeteria plans, the benefits provided to employees under these plans are not subject to payroll taxes and thus can yield substantial savings to the employer. In addition to the tax savings, offering these types of benefits can help you attract and retain top talent; a win-win solution.”
– Eric S. Fletcher, CPA, Senior Tax Manager at Bond Beebe, Accountants & Advisors
Mistake #7: Submitting 1099’s or W-2’s behind schedule.
“Not issuing 1099’s or W-2’s by the necessary due dates — January 31st to be issued to employees and consultants; February 28th to submit documents to the IRS. It is imperative that both deadlines are met to minimize assessed IRS penalties.
– Michael Kaplanidis, CPA, Managing Director at Water Street Associates
Mistake #8: Consulting with a tax specialist irregularly or not at all.
“Often, small business owners fail to realize tax deadlines and obligations and have bad record keeping, which leads them to having little knowledge of their own financials and miss opportunities for deductions, retirement planning and tax savings. Being penny-wise and pound-foolish when it comes to accounting fees can hurt the client more than they may even realize by resulting in lost opportunities and dollars.”
– Timothy McHale, CPA, Partner at Cerini & Associates, LLP
Mistake #9: Fail to render adequate records of business expenses.
“For example, travel and entertainment expenses should reflect the time and place of the activity, the business purpose and the business relationship of the person being entertained. You need to have more than a general expectation of gaining a business benefit from the entertainment. You must be able to show that you engaged in some business activity, other than the entertainment, such as a meeting, negotiation, discussion or other bona fide business transaction.
– Bruce Givner, Tax Attorney, President at Givner & Kaye, Inc.
Mistake #10: Filing an extension.
“Don’t file an extension. The IRS pulls those they audit from those who file before and slightly after the deadline. Make sure you prepare your returns so you know what you owe, but that you don’t actually file them until at least 2 months after the deadline.”
– Shauna Wekherlien, CPA/MTAX at Tax Goddess Business Services PC
Mistake #11: Being unaware of actual startup costs.
“Often, small businesses are not aware that all expenses incurred before the first sale are called “start-up costs.” You should save all the costs you incur as you are investigating the business and then you can deduct them when you have your first sale. You have a choice to deduct these start-up expenses over 15 years or elect to deduct the first $5,000 of these costs in the first year of business. Careful tax planning is needed as you have choices of deducting these expenses currently or saving these expenses for future use when you qualify for a higher tax bracket.”
– Gail Rosen, CPA, PC, President at Gail Rosen, CPA ,P.C
Mistake #12: Taking a hands-off approach to accounting records and tax preparation.
“Many small businesses hand-off accounting records to their accountant at the end of the year and that ends their involvement in the preparation of their business tax returns. As a result they may not have a good understanding of how their taxable income is determined and why their business taxes are what they are. While this is one of the things a business person hires an accountant for, participation in the process can only improve the result which is to understand their businesses operations and to minimize taxes.”
– Paul Herman, President at Herman & Company CPA’s, P.C.
Mistake #13: Not maintaining an accurate and complete set of books.
“Many small business owners forget about business expenses they paid with their personal funds or track the number of business mile they drive during the year. When the books don’t capture these expenses, deductions are missed and tax dollars are left on the table.”
– Neil Johnson, CPA, Partner at The Dolins Group, Ltd.
Mistake #14: Trying to tackle payroll, independently.
Payroll can be daunting. “There are rules regarding a) the frequency of deposit requirements of payroll taxes b) when to file payroll tax returns and 3) what forms to file with the IRS or the appropriate state agencies. For example, we have seen clients encounter civil penalties for not properly filing W2’s with the Social Security Administration. Therefore, you are always best served to leave payroll to your CPA or one of the big box providers (e.g. ADP, Paychex, etc.) as their fees will be far less than any penalties or headaches you could encounter.”
– Vincent Porter, CPA, Partner at Porter & Company CPA’s
Mistake #15: Not hiring competent help to ensure everything is done correctly.
“As a company grows, small business owners may assume that tax filings and payments are no more difficult than when the business was small. However, as the numbers become bigger, it is imperative that either an outside accountant view the process for determining liabilities and filing forms, or that someone within the business is trained in developing a procedure to guard against errors. Business owners are the best at their chosen profession. It’s impossible to be the best at taxes and tax filing too. Stick with what you know best and get help for the rest.”
– Samuel L. Kerch, CPA/CPP/CGMA/CIPA, Principal at AskCPASam
Ultimately, every small business can benefit from tax planning support, which often extends beyond annual April 15th deadlines. From trusts, estate planning, investments, business and personal expenses, payroll, business structure and self-employment, a tax specialist can help you successfully navigate your company’s tax position and set the foundation for future success.
Resources: Find qualified tax preparers ( National Association of Tax Professionals) and certified public accountants (CPA Directory) nationwide. Or visit IRS.gov for more information on business taxes.
Disclosure: I am writing on behalf of Visa Business and receive compensation for my time from Visa for sharing my views in this post, but the views expressed here are solely mine, not Visa’s. Information and opinions are presented solely for informational purposes, and are not intended, nor should they be construed, as a substitute for legal, accounting or tax advice. You should consult an attorney or tax advisor for individual advice regarding your own situation.
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