Tax season is here. While it may be the last thing you want to think about, mistakes you make now could mean you pay too much, miss deductions – or worse, trigger an audit. Fortunately, a professional tax adviser can help.
We asked Cheryl Ross, owner of A #1 Document Services and a tax preparer in Las Vegas on Thumbtack, to share the most common mistakes she sees small business owners make and how to avoid them.
1. Mixing Business and Personal
Ross says the biggest mistake she sees are people who co-mingle their personal and business funds. “It’s important to keep them as two completely separate entities. First, if the IRS were to audit you, they frown on co-mingling. Second, when you go to do your taxes and bookkeeping, it’s impossible to track your expenses if you don’t keep them separate.” She cautions that if you don’t keep them totally separate, you will either miss or double-up on expenses because they were paid out of an account you’re not tracking or with cash out of your wallet.
How to avoid this: Use a separate credit card and bank account that are just for business.
2. Not Keeping Good Records
“If you’re not keeping thorough records, you’re either missing expenses or you’re guessing,” Ross says. “And if you were to be audited, you have nothing to prove your numbers.” This means you may miss legitimate write-off opportunities, or, even worse, lose the deductions you’ve taken.
How to avoid this: Save receipts and invoices, and use software to record income and expenses.
3. Filing as the Wrong Type of Entity
“A lot of people don’t understand the different types of business entities,” Ross says. “If you don’t have the proper entity type set up, or if you’re filing incorrectly, it could cost you a lot of money.”
Ask your tax professional to guide you and help you choose the form of business that meets your needs. “It can always be changed, but unless you plead with the IRS, it’s usually changed for the following year, not the previous one.”
How to avoid this: Ask your tax advisor every year if your entity identity is the correct one for your small business.
4. Not Claiming a Home Office Deduction (or Claiming Too Much)
More than 50 percent of businesses in the U.S. are run from home, and if you meet the requirements for a home office deduction, it means you can deduct a portion of home expenses, including mortgage interest, rent, insurance, utilities, and repairs.
“A lot of people either don’t take the home office deduction when they can or they’re taking way too much,” Ross says. The latter is a result of people who don’t understand that in order to claim a home office deduction, the home office must be used exclusively for conducting business.
How to avoid this: If you have a space in your home that is used exclusively for business-related activity, deduct it! Just know that the room cannot perform double duty, like as a guest room or playroom, even a few days a year.
5. Failing to Keep Track of Mileage
Business driving is basically any driving you do for business reasons, except commuting. That’s great news for anyone who has to travel a lot, but what Ross says she sees is that most people keep track of their gas and repairs, but not their mileage. “Mileage is the better way because it can add up to a big deduction,” she says. “You’re cheating yourself otherwise.”
How to avoid this: Download an app or apps that tracks mileage driven for work, charitable work, and medical reasons. If you’re audited, you’ll have everything you need to show the IRS.
6. Missing Deadlines
Ross says many of her clients fail to meet tax payment deadlines. “If that happens, the IRS is going to charge you penalties and interest,” she adds. If you get behind on these payments, it can be very difficult to get caught back up.
How to avoid this: Set aside money for taxes in a separate account as soon as your receive it. Set calendar alerts so that you know when estimated taxes are due and file on time.
The good news? There are lots of tax advisers on Thumbtack that can help.