Common Business Tax Preparation Mistakes to Avoid


So you are claiming your entire $5,000 family cruise vacation as a business expense because you passed out one business card to a person at the bar? It is these problems that can get you in hot water with the IRS as you will be staring down at an audit of all your financial records.

Filing your small business taxes accurately allows you to meet all local, state, and federal regulations while also ensuring you are getting all the reasonable tax deductions for your business. We have gathered a list of common tax preparation mistakes that small business owners can make.

Co-Mingling Business and Personal Bank Accounts

It is the top mistake that small business owners make. It usually happens when they are an independent contractor who normally placed their business income into their personal bank account yet the person is now considering becoming a larger business and hiring employees.

Unfortunately, they are still placing their sales profits into that same account. Once you take that step into small business ownership, you need to have a separate business account to make it easier to track all your business-related income and expenses. You should also have two separate bank accounts even when owning a home-based business.

Overlooking Business Deductions

There are numerous business deductions that a small business overlooks yet these expenses can significantly lower your taxable income. A person who has to drive to other business locations will normally take a mileage deduction. Yet there are also other tax deductible things related to using your car for business such as lease payments, parking fees, toll fees, insurance, gas and even the tires.

No matter if the deduction is small, they can add up to significantly lower your taxable income. You can even claim a percentage of your phone and Internet costs as a tax deductible expense in a home office.

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Claiming Higher Deduction Amounts Than Normal

It is easy to get carried away with the tax deductions. Most often the problem lies where you are claiming a full 100-percent tax deduction for an item where you can only claim a partial deduction.

Accounting services can help you by going over what actually qualifies as a business tax deduction and how much you can deduct from those expenses on your tax forms. Always keep in mind that constantly having the same expenses that aren’t normal for the type of business you operate can create red flags to the IRS.

Forgetting to Include Expenses for Starting Your Business

The moment you make your first sales transaction is normally the moment when you begin reporting your business taxes. Yet did you know that your startup expenses are also tax deductible?

During the period when your small business wasn’t in full operation, you acquired capital expenses when analyzing a business market segment that you wanted to delve into, training employees, advertising your business before the grand opening, and travel costs to locate suppliers and vendors. You can claim these expenses as deductions. Having accurate financial records and working with accounting services can allow you to figure out what startup deductions you can claim.

Recording Inaccurate Payroll Taxes

It only takes one misplaced period in your payroll tax filings to create mounds of audit paperwork and headaches from the IRS. It is essential to keep accurate reports of your taxes both as an employer when reporting business income and losses, as well as when collecting employee taxes and paying wages. If you are not an expert with either the accounting and tax aspect of your business, there are many accounting services and payroll software available that can assist you. Then you can be rest assured that your recordkeeping is as accurate as possible.

Avoiding these tax preparation mistakes will allow you to run your business optimally, receive the tax deductions for your business operations, and pay all required tax obligations. In addition, you will also be able to use the accurate income and expense reports to forecast future business growth so you can begin expanding your operations.

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