Worst Small Business Taxation Mistakes

Although the official tax filing date has passed us by, the subject matter of this blog is still relevant because many taxpayers have filed extensions and have a number of months before the extended filing date is final.

Immunity from making mistakes on your tax returns is something that no one can ever really guarantee. Some mistakes are accidental while other kinds of mistakes are not so accidental or are intentional.

Unfortunately, even accidental mistakes are liable for penalties and interest. If proven to be intentional, or fraudulent, the penalties for committing fraud can be much more severe.

At times there can be a fine line between honestly taking every deduction you think you are entitled to and being overly aggressive.

In fact, in some cases it’s gotten out of hand, as USA Today has reported:

Those who file “Schedule C” tax forms--sole proprietors who file individual, not company, tax returns--under-report income by a whopping 57%. The IRS knows this, and it’s one reason that the IRS has small businesses and sole proprietors in its sights.

Their report recommends that businesses avoid the following six mistakes:

1. Hiding income: If you do a lot of business in cash, it can be tempting to stash that cash rather than reporting it. The IRS knows that cash-heavy companies and independent contractors who typically get paid less than $600 (the threshold for filing a form 1099) often under-report income, and they’re on the lookout for them.

2. Not reporting trackable income: If you’re an independent contractor, any company that paid you more than $600 in 2016 must send you and the IRS a “Form 1099” reporting your total income. Thus, the IRS knows how much you’ve earned. They’ve got your number, so report it.

3. Deducting startup expenses: Startup expenses are treated differently than other business expenses. You can only deduct $5000 of startup expenses incurred before the business starts. All expenses over that amount must be depreciated over 180 months.

4. Going crazy with deductions: One of the benefits of owning a small business is that you have quite a few legitimate deductions available to you. But trying to deduct all the costs of that week-long family trip to Hawaii because you met with one potential customer for an hour? Not so fast. Travel, entertainment, and meal expenses are the ones most likely to be scrutinized.

5. Having a hobby business: The IRS is skeptical of businesses that look like hobbies. If you don’t make a profit three years out of five, the IRS will need you to show you’re really working at making a profit and have a reasonable expectation of doing so.

6. Taking the home office deduction: The IRS allows you to deduct the expenses of using a portion of your home as your primary office or workspace. In other words, if every day you use your guest room as your office but once a year your mother-in-law stays in it when she visits the grandkids, you no longer qualify for the home office deduction.

And if these 6 mistakes aren’t enough to satisfy your curiosity then there are a few more here, as reported by American Express:

Filing certain forms and schedules. Some of these are actually invitations to be audited. For example, if you start a business and want to keep the IRS from challenging it as a hobby activity for which losses will be disallowed, you can file Form 5213.

This prevents the IRS from auditing you for five years in most cases. But at the end of this period, the IRS will likely review your returns for these years to see whether you’ve met the presumption for a profit motive (being profitable in three out of five years). Think very carefully before you file any form.

Overreporting income. If you sell goods on which you collect sales tax, your reportable income should not include the sales tax. Be sure to subtract the sales tax before reporting the income from the sales.

Misclassifying workers. Make sure the workers you pay as independent contractors aren’t really employees. This hot audit issue can result in significant payroll tax penalties if you’re wrong. Understand the IRS tax rules for worker classification, which you can find here.

Paying sufficient enough attention to detail can result in a significant and favorable tax savings, let alone keeping the IRS “audit squad” at bay.

Furthermore, it will pay dividends if you engage the support of a CPA or tax attorney.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.