If you own your own business, it might be because you decided to pursue a personal passion or because you recognized an opportunity in the market where you could be successful. Passion and opportunity, however, don’t always mean you’re ready for many of the realities that come with the day-to-day obligations of being a business owner.
For some, that may include managing taxes. Being aware of some of the missteps can alleviate a lot of stress when it comes time to file your taxes. Here are six common mistakes to be mindful of throughout the year:
- Not saving receipts of less than $75 for meals and entertainment. Although the receipts aren’t required, in order to substantiate your deduction, your records must show required information including the number of people involved, amount, date, place and business purpose, and a receipt is a handy way to track that. Lose that receipt and you could lose a 100 percent deduction for both 2020 and 2021.
- Forgetting to track out-of-pocket expenses. Because of convenience, sometimes business owners will pay for business expenses out of their own personal funds. Keep tabs on those expenses and turn them into the business for reimbursement.
- Treating employees improperly as independent contractors. This has always been an area of focus for the Internal Revenue Service. If improperly classified, you could be faced with employment taxes, penalties and interest back to the first day of work.
- Erroneously classifying a hobby as a business. Unless the activity is expected to generate profits on a regular basis, consult with your tax preparer before engaging in the activity. Deducting too many years of losses can set you up for a potential audit.
- Not responding to every IRS notice. If the IRS sent you a notice, you need to work with your tax preparer and make sure you respond to it. The worst thing one can do is to allow the IRS to escalate their efforts if you fail to answer their queries.
- Failing to file tax reports if you cannot pay. Always do your part and file because failure to file penalties can be 10 times higher than failure to pay penalties. Don’t incur an unnecessary, extra expense when you’re already unable to pay your taxes when they’re due.
This is by no means a complete list of the things you should be mindful of, and it’s important to work with your tax professional to manage your tax obligations during the year. If you’re in need of accounting or tax support, Padgett has network of CPAs, enrolled agents, and other tax professionals available to help your business. Feel free to contact us today.