Small business tax errors are pretty common, and while many go unnoticed by both the companies that file and the IRS, many are selected for an audit due to incorrect or suspicious information provided.
To avoid an audit – clearly the goal of any business at tax time – you should know the most common small business tax errors so you can adequately plan to avoid them.
The top 3 small business tax errors are so common, you may not have realized you’re making them yet. Read through our list below to ensure you’re filing your taxes properly and get the most out of tax time!
Top 3 Small Business Tax Errors
Wrong business structure selected
Have you filed as a C-Corporation? That’s a mistake if you’re a small business. Corporation profits are taxed to a) the corporation earning them and then b) the shareholders of the company when the profit is distributed among shareholders as dividends. That’s right – C-Corporations are taxed twice. If you’re a small business and you’ve filed as a C-Corporation, you’ve made a serious error.
Check out the other business structures for small businesses instead – S-Corp is often recommended because you’ll only pay taxes on company profits via your personal income tax. The end result is you only pay once and you’ll end up paying less.
Blending business and pleasure
If you’re trying to avoid an audit, this is very important: Do not mix business and pleasure when it comes to tax time. This means not filing expenses that are not business-related with your business expenses.
Anil Melwani, CPA at 212 Tax and Accounting, says he’s witnessed it every year: Business owners trying to pass off expenses “that are clearly personal, such as home rent, pet expenses, groceries, clothing, and personal items.” That raises a red flag with the IRS and puts you under unwanted scrutiny with a major risk for audit.
Skip this scenario by keeping a separate business and personal account. If you do use your business card for a personal expense every now and then, make sure you don’t file those expenses on your taxes.
Finally, the last of the top 3 small business tax errors is paying late. More people do this than you realize. The IRS charges penalty fees for late tax payments – usually a penalty of 0.5% to 1% on your income tax bill each month it’s not paid. Late payment penalties for late payroll tax deposits are much more severe.
If you can’t pay your tax bill on time, contact the IRS to set up a payment plan. There’s a small flat fee for doing so, but you’ll find it will cost less than the penalty they would have to impose if your payment was late.
These are the top 3 small business tax errors made each year, according to experts. Avoid these small business tax errors to ensure you’re not paying more than you need to, that you won’t be selected for an audit (or at least make it much less likely), and to sidestep IRS late payment penalties. Good luck!