8 Common Business Tax Preparation Mistakes

The realm of business taxes might seem like a minefield of potential liabilities.

The good news is that by knowing where business owners slip up most often, you can navigate this terrain with greater confidence.

In this article, we’ll share eight common and costly tax prep missteps and how to avoid them.

1. Using the Wrong Forms

Business owners need to know which tax documents correspond to their business’s legal structure.

Sole proprietorships, partnerships, LLCs, S corporations, and C corporations all use different forms for federal income taxes. Those forms may require additional attachments, like a Schedule C (Profit or Loss From Business) on a solo entrepreneur’s Form 1040. Plus, you may have to file state and local income taxes, property taxes, payroll taxes, sales taxes, excise taxes, and/or franchise taxes.

If your head is spinning, don’t panic – consult an experienced accountant who can help you get all the paperwork in order.

2. Filing Late

Failure to file and pay your taxes on time can lead to costly penalties.

On the IRS side, you’ll find different deadlines for income taxes, estimated taxes, payroll taxes, and employee and contractor statements. What’s more, some dates differ depending on your business entity type, and they’re subject to change each year. Check IRS.gov, as well as state and local resources, and mark your calendar for the year ahead.

If you need more time to prepare a return, you can file an extension, but be aware that any owed tax is still due by the original deadline.

3. Mixing Business and Personal Expenses

According to the IRS’s newsroom, this is one of the surest ways to turn a routine audit into a giant headache.

The authorities say it’s especially a problem for solo entrepreneurs who use a single credit card for convenience. But this is a lose-lose scenario: you risk making improper claims and missing out on valuable deductions could result in penalties. The commingling of funds can erode the liability protections that an LLC or corporate structure should provide.

Maintain separate accounts and payment cards and clearly document any accidental mix-ups or intentional reimbursements.

4. Getting Behind on Estimated Payments

From major corporations to side hustles, most enterprises have to pay quarterly estimated taxes.

If you owe more than $1,000 in income tax when you file your annual return, you could owe penalties and interest. Plus, repeat offenders may be at a higher risk of getting audited. 

Look up the applicable deadlines – they’re different for corporations versus other business entities – and set aside ample time to prepare.

5. Ignoring the Books

If tax time feels like a mad dash to the finish line, it could be that your financial records need more attention year-round.

If you don’t regularly generate income statements and reconcile accounts, it can be hard to properly report your income and expenses. And if you don’t retain backup documentation like receipts and invoices, you won’t be able to substantiate your claims in case of an audit.

Explore software solutions that can help streamline your routine bookkeeping and tax preparation. If your business can support it, hire an experienced bookkeeper. They can focus on the books, while you focus on growing the business.

6. Entering Incorrect Information

While tax codes are famously complex, simple math and clerical errors are to blame for many incorrect filings.

A little typo, like inputting “37” instead of “73,” could lead to you miscalculating your tax liability and needing to file an amended return. Tax prep software will do the arithmetic for you, so there’s less chance of human error.

We advise using an experienced accountant for tax preparation. However, if you are filling out the forms yourself, double-check your numbers and cross-verify them with your financial records.

7. Neglecting Deductions

The IRS lets you deduct costs that are “ordinary and necessary” for operations – and it’s in your interest to take every write-off you can. Once you know the rules, recordkeeping is key.

If you’re an independent contractor, you may be able to write off business mileage on personal vehicles and home office expenses. If you regularly take clients out for meals, look up the deductions currently available under the Tax Cuts and Jobs Act of 2017. A tax professional can help you maximize your deductions while staying on the right side of the law.

8. Going It Alone

Entrepreneurs tend to have an independent streak, but when it comes to bookkeeping and tax preparation, you need to know when to seek help.

As we’ve seen, business taxes are more complex than personal taxes, and the stakes for accuracy are often higher. Leveraging the specialized knowledge of a qualified business accountant means you can focus on your customers. Depending on your agreement, they may also assume some liability for inaccuracies in your return and penalties that may result. At the very least, they will want to protect their professional reputation.

Seek referrals from colleagues and consult the IRS’s Directory of Federal Tax Return Preparers with Credentials and Select Qualifications.

For more individualized guidance on simplifying your tax prep process, consult your tax advisor.