Filing your business tax return each year is a must, but you definitely don’t want to mess it up. Mistakes can lead to paying more taxes than necessary, attracting unwanted attention from the IRS, or even incurring interest and penalties. Here are 20 common mistakes you should avoid:
-
Misreporting Income: Make sure you report your income correctly. If you’re an independent contractor, for example, you’ll receive a Form 1099-NEC. If the form is incorrect and you can’t get it fixed, report the wrong amount but adjust it properly. Attach an explanation to your return so you’re only taxed on the correct amount.
-
Failing to Report Income: If you barter for business goods and services, or use virtual currency, you need to report these transactions. The IRS keeps a close eye on virtual currency transactions.
-
Overreporting Income: If you sell inventory items, remember to factor in the cost of goods sold. You don’t want to pay tax on the total sales receipts. Your income is only the difference between what you sell an item for and what it cost you.
-
Not Applying the Limitation on Deducting Meals: Only 50% of certain business meals are deductible. Even if you’re wining and dining a customer or paying for your own meals while on a business trip, you can only deduct half the cost.
-
Mixing Personal and Business Finances: Keep your personal and business finances separate. This helps you avoid overlooking a business deduction or mistakenly treating personal income as business revenue.
-
Not having a Mileage Record: If you use your personal vehicle for business, you need to keep records. If you don’t, you’ll lose your deduction for business driving.
-
Thinking the Home Office Deduction is an Audit Red Flag: Don’t be afraid to take the home office deduction if you’re eligible. It’s not an audit red flag.
-
Overlooking Pre-opening Expenses: If it’s your first year in business, you might be able to deduct startup costs incurred before you opened your doors.
-
Not Utilizing Retirement Plans: Contributions to qualified retirement plans can reduce your current tax bill while saving for the future.
-
Failing to Keep Basis Records: Business losses that pass through to partners and S corporation shareholders can only be claimed up to certain basis amounts. Without such records, losses are lost.
-
Overlooking Carryovers: Some business write-offs from prior years may be deductible now. Check for carryovers of net operating losses, capital losses, investment interest, the home office deduction, and the general business credit.
-
Not Obtaining Acknowledgments for Charitable Contributions: If you donate $250 or more, you need a written acknowledgment to take a deduction.
-
Underpaying Estimated Taxes: If you’re required to pay estimated taxes, make sure you factor in all the taxes besides income tax.
-
Not Claiming the Qualified Business Income Deduction: This personal deduction for owners of pass-through entities is based on business income. It’s a valuable way to reduce tax liability.
-
Fudging Worker Classification: Don’t avoid employer tax obligations by mislabeling employees as independent contractors.
-
Failing to File on Time: Watch the filing due date. If you can’t file on time, ask for a filing extension.
-
Failing to Attach Required Forms, Schedules, or Election Statements: Your return isn’t complete unless you include all the required paperwork.
-
Not Understanding the Differences in Federal and State Tax Rules: Some tax breaks on federal returns are limited or barred for state income tax purposes.
-
Not Staying Up on Tax Developments: Changes in the tax law may entitle you to new tax breaks on your current return.
-
Not Disclosing Everything to your CPA: If the IRS disallows deductions or changes what you owe in taxes, they may also impose an accuracy-related penalty. You can avoid this by showing you relied on a tax professional, but you must have disclosed all relevant information to them.
