If you’re new to business, you better hope you’re organized by the time tax season rolls around. You may may not have the necessary capital to hire an accountant, so it’s best that you’re knowledgeable around your small business taxes. Here are three common tax mistakes your small business can easily avoid:
1. Unaware of your Tax Year
When it comes time to calculate your taxable income for your business, you’ll need to know your correct tax year. The two tax years you can use are:
- Calendar year – 12 consecutive months beginning January 1 and ending December 31.
- Fiscal year – 12 consecutive months ending on the last day of any month except December. A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month.
Unless your tax year is required, you’ll essentially adopt a tax year when you file your first income tax return using that tax year. A required tax year is one that’s required by IRS code and income tax regulations. Partnerships, S corporations, and personal service corporations (PSC) will need to use a required tax year.
Once your tax year is set, you’ll need to submit a request to the IRS to change it. Make sure you’re well aware of your deadline because you definitely won’t want to miss it.
2. Failure to Separate Personal and Business Expenses
Every business owner is given the opportunity to receive tax deductions by writing off business expenses. The problem is, sometimes these business owners get a bit carried away. Very rarely is this mistake an “accident”. You need to be very diligent about separating your business expenses from personal ones.
When making a credit card payment you absolute need to have separate accounts for purchases. This is far and away the easiest way to separate your expenses. NerdWallet does a great job in laying out the benefits of these small business credit cards. Spend the time to shop around and pick the right one for your business.
When tax season rolls around, deducting your business expenses will be a breeze because they’ll all be in one account. However, this also means you’ll need to be disciplined on what qualifies as a business expense. I know it’s tempting to throw your family vacation to Hawaii on the business card, but it’s never worth the potential audit.
3. Two plus Two equals Four
What a surprise! Millions of Americans forgot to double check their math when filing taxes. Its no secret that the IRS reports millions of math errors every year on filed tax returns. I know it can get very difficult when you’re trying to sort through rows and columns of numbers, but it’s very important to double check and even triple check your work. The best way to avoid errors is to use a third party service.
If you don’t have enough funds to hire a full-time accountant you can use a third party service for an extremely affordable rate. Check out the top three small business tax services of 2016 and shop around a bit for the right fit. These services allow business owners to input their values and all the math is done for them.
If you’re going to defer to a third party, it’s important that you keep good records of your financials. A great way to accomplish this is to use an online billing and invoicing platform. Keeping an electronic record of your finances makes it extremely easy to calculate the totals come tax season.
Nobody really enjoys tax season, but we all need to embrace it. For small business owners especially, it’s important to know your tax implications. If you want to avoid being taxed by tax season, avoid these three common mistakes.