Avoid These 3 Common Tax Mistakes
April 15th is looming. The annual tax deadline is no one's favorite occasion, but dealing with your taxes is as inevitable as it is unpleasant. Unfortunately, for business owners the process is even more complicated and onerous. So how can you stay on the right side of the IRS while minimizing the amount you have to pay them?
In an effort to help entrepreneurs this tax season, online accounting software company Xero surveyed 500 U.S. accountants, asking their opinion of the most common mistakes made by small businesses.
The results were released this morning, revealing these common missteps:
- Mixing business and pleasure. A whopping 45 percent of accountants report that mixing business and personal expenses in deductions is the most common mistake business owners make-- a mistake that usually triggers an audit by the IRS. A quarter (26 percent) of respondents say it is excessive deductions to income.
- Not deducting the home office. Three in ten say the home office is the most commonly overlooked deduction for small business owners, while 24 percent say it is hiring new employees.
- No knowledge of your own financials. A quarter of accountants surveyed say not having ongoing insight into their financials is the most common mistake small business owners make when it comes to finances, while 18 percent say it is only talking to their accountant during tax time.
Do you recognize your business in any of these errors? If so, fear not, Xero has also helpfully provided a handful of tips to help small businesses minimize tax headaches (and bills):
- Forecast your financials. Take a look back at financial statements, activity, and sales to determine what worked and what didn’t so you can make a plan for the year ahead. As part of forecasting, understand the sales tax the company owes and keep that money in a different account to eliminate the possibility for error.
- Insight into cash flow. Have a daily process in place to easily review cash you can expect and also know what is overdue. This way you can immediately follow up on delinquent payments. (Unsurprisingly, Xero recommends Xero to accomplish this, but that doesn't invalidate the underlying advice.)
- Understand tax time obligations. Take the time to understand your tax obligations and learn if you've changed at all from the previous year. By planning ahead for their obligations and meeting regularly with their accountant to estimate what will be owed, entrepreneurs can plan accordingly so you can start and finish the year strong.
Still stressed about that big red circle around April 15th on your calendar? There is plenty of additional advice available to help you calm your nerves. The American Institute of Certified Public Accountants, for instance, is offering ten tax tips for small business owners, including avoiding claiming more deductions than income for two years running or using payroll tax deductions withheld from employees to finance business operations. The Chicago Tribune also has a helpful article on common triggers for IRS audits and Business Insider has a lengthy 'Freelancer's Guide To Filing Taxes In 2012,' for those that are self-employed.
Have you learned any helpful tax tips through hard experience?
JESSICA STILLMAN | Columnist
Jessica Stillman is a freelance writer based in London with interests in unconventional career paths, generational differences, and the future of work. She has blogged for CBS MoneyWatch, GigaOM, and Brazen Careerist.