Avoid Frequent Tax Mistakes by Keeping Good Records
Demands on the time of a business owner are massive and that can create a special challenge when it comes to being fully prepared for tax time. You may not be able to change the outcome of your last business filing, but you can take some of the stress out of next tax season through education and preparation. This article can help you avoid frequent tax mistakes many business owners make.
The number one advice for small business owners is to keep accurate and complete records. Complicated tax laws cause many small business owners to make mistakes in bookkeeping and record-keeping. However, business owners can avoid making some of the common mistakes and minimize their liability with dedicated record keeping all year long.
Following are some of the frequent tax mistakes small business owners make and suggestions on how to correct or avoid them:
- Not saving receipts for expenses under $75.00. There are some expenses the IRS does not require receipts for - meal and entertainment expenses if the cost is under $75. The exception is lodging where receipts under $75 do need to be retained. However, you still need a record of what you spent, where, who you were with, the business relationship, and the purpose of the expense. When you look at the requirements it is in your best interest to keep the receipt with written information about whom you went there with and why. Make sure the receipt is also date and time-stamped.
- Treating equipment as an expense instead of an asset that should be depreciated over time. Equipment is considered a capital expense and it has to be depreciated. Supplies are items that are used up in a short period of time. A general rule to follow is that when you acquire an asset for your business that is expected to last for more than a year, you usually have to capitalize the cost. There are also limitations to how much a business can expense as materials or supplies. Check with your accountant on tax laws for equipment purchases, as they change frequently. Remember that equipment purchases can also be a good business deduction, so think about making a purchase before the end of the year so you can write it off on your next tax return.
- Forgetting to track reimbursable expenses. As a small business owner you will no doubt have to pay for some expenses out of your own pocket or with a personal credit card. Don't make the mistake of losing track of those expenses and having the company fail to reimburse you. And don't forget to keep track of any cash purchases! Your receipt will be your only record of those.
- Miscalculating automobile deductions. There are different ways to calculate deductions for the use of a car or truck. Find one that suits you and stick with it. You can either take a standard mileage deduction or a deduction for expenses, but you cannot mix and match. You could have your accountant calculate both and see which one benefits your business the most. The amount to calculate for mileage changes every year so here is a link to the IRS standard mileage rate table. Don't forget there are some great apps out there to help you collect the right data to claim mileage.
- Not claiming all your eligible deductions. Your accountant should be able to steer you in the proper direction on what can and cannot claimed, but there are some items businesses can miss such as deducting business insurance. Business related insurance premiums are generally fully deductible, so be sure to ask your accountant if this is the case for your insurance and what the exceptions are.
- Giving more than you can receive. You can offer gifts to clients and business associates, just check with your tax professional to make sure that you are not going overboard. There is a limit on the amount of deductions you can take for these items, ex: there is a $25 annual limit on the amount you can deduct for gifts to any one person. Gifts to employees must also be accounted for. They are considered a fringe benefit and for the most part taxable. There are a lot of rules in this area such as, a gift certificate is taxable but a gift card for a specific item of minimal value may be excluded from being taxed. The confusion comes from the range of items and amounts that are included or excluded from being taxed. The general tax rule is that all forms of compensation are subject to income tax unless they fall under specific exclusions like de minimis fringes. Again, getting clarification from a tax adviser is the best line of action.
- Not reviewing last year's tax returns. A recommended practice is to make a habit of looking though last year's tax returns before you file for the current year. The information in your tax papers can be a reminder of areas you may have overlooked in the past or adjustments you want to make on what to track for better results this year.
- Not getting automated. There are a great variety of free and fee-based apps and other accounting solutions available to you on the internet. Although “old-school” Excel spreadsheets work just fine and are often the go-to for new businesses, once you become a business of any size or complexity you will find this method becomes more time consuming. You also need to have some basic accounting skills to set Excel up to do the right calculations. If this is not your strong suit or you want to save a little time there are other options that have the calculations and even the right tracking categories built in to help you track more efficiently. Here is a link to a good article on the “Best Accounting Software for Small Business 2017,” but be sure to do some of your own research or ask for recommendations from business owners you know personally.
Keeping receipts and good records does not have to be a difficult task. Talk with your accountant or tax professional to see what records you should be saving and make sure to pay attention to the common mistakes listed above. A good record keeping system is the only way you will know if your business is making a profit. Keep in mind, IRS publications on all of these topics can be downloaded and will begin with a section called “What's New.” For further information, here is a link to the IRS page about recordkeeping.
Pro Tip: It is often more cost effective to first talk with your bookkeeper about tracking systems. Their rate can be considerably less than a tax accountant. They can usually handle first-level questions and lessen the time you may need to spend with your accountant later on.
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