No small business owner wants to get a call from the IRS. But you’re busy running your business and it’s tough to stay on top of everything you should be doing to get ready for tax time. A little planning should help you avoid some of the most common small business tax problems:
- Sloppy record-keeping: Have you got a mileage log for your business vehicle? Receipts for your marketing expenses, down to the last flier-copying charge? Have you kept receipts for all your travel expenses, business meals, and other business expenses? Many small business owners’ records are a mess. The result can be lost deductions if the IRS reviews your return and asks you for documentation.
Sure, you don’t have to keep receipts for meals or entertainment under $75, but keep them anyway. They give you a place to note the mileage, parking, and other expenses you had in connection with that trip. When in doubt, keep it.
- Employees vs. independent contractors: Know the rules for how to classify your employees, as the IRS looks closely at this area. The IRS provides a good explanation of its rules on its Web site; see “Independent Contractor (Self-Employed) or Employee?” to help properly classify your workers. This is a common area for tax trouble. Declaring full-time workers who are required to come to your office for set hours and adhere to your dress code as independent contractors simply to avoid paying their unemployment and other benefits gets the IRS’ attention fast — often because of worker complaints.
- Borrowing from tax trusts: Companies that pay payroll or sales taxes usually have dedicated accounts that accumulate this money for payment to the appropriate agency. But when cash flow gets low, some business owners borrow from that account to cover day-to-day expenses. This is a recipe for disaster.
If you don’t have the money to replenish the account when it’s time to make your tax payments, you’ll be in for some unpleasant surprises. The IRS, state, or local tax agencies may assess fines for late payment, place liens against your business that are disclosed to the public, or ultimately seize your company’s assets to get what they’re owed.
- Creating deductions you can’t use: Be aware of how much you’ll likely be able to write off for a business expense or activity so you don’t exceed limits. For instance, you can only deduct $25 per customer for client gifts — good to know before sending your best customers on a trip to Cabo.
If you’re having a down year, know that you have less revenue against which to make deductions before your business will show a loss. You can only do this in two of five years, or the IRS will reclassify your business as a hobby and disallow most of your expenses in future years.
- Not thinking ahead: Nearly every business move you make has tax consequences. If you think about the tax impact of business moves before you make them, you can save a bundle. For instance, many deduction rules change from year to year, so timing an equipment or vehicle purchase right could mean thousands more you can write off right away. The list of energy-efficient cars that get a special deduction also changes yearly. Be sure you check the most current tax law or consult a tax professional before making a decision.
Business reporter Carol Tice contributes to several national and regional business publications.