Income tax returns are undoubtedly complex and taxing. A small business owner may feel quite pressured with approaching the due date for filing the tax return. Often business proprietors commit errors in filing the return either due to lack of awareness or pure haste.
Unfortunately, such mistakes can bring heavy penalties. That's why, when it comes to taxes, accuracy is a must!
Let's enlighten you with some tips to avoid common tax mistakes.
1. Failure to report income
You are mandatorily required to report your business income to the IRS office by filing your tax returns. Even if the nature of your business is trading or you only virtual currency or barter exchange for your business dealings, you're still legally bound to report the income.
2. Misreporting income
Some small business owners assume that if they fudge their accounts a little bit and misreport the income, it will go unnoticed by the IRS. Underreporting income and not including transactions, is likely to draw penalties. The software system in the IRS office can link transactions and pick up such misreporting easily.
Some businesses commit the mistake of over-reporting their incomes by ignoring cost of sales. Such errors of valuation and income reporting should also be absolutely avoided.
3. Mixing personal and business expenses
Not categorizing personal and business expenses separately at the time of calculating your taxable income is one big mistake many small business owners make. Unfortunately, due to this error, you could lose the opportunity to claim deductions for business expenses. You should have different bank accounts for business and personal use. This will make it easy for you to classify the expenses as business or personal.
4. Not saving your mileage receipts
Most small businesses use their personal vehicle for business operations. In such cases, it is important to save the records for mileage so that you can deduct business-related driving expenses from your business income. You are expected to keep records in accordance with the IRS guidelines.
5. Not claiming home office deductions
Sometimes out of ignorance, and at other times due to fear of audit, many business owners don't claim home office expenses for deductions. If you're making the same mistake, you must be losing out quite a few bucks on the tax payment front. Be aware that home office deductions are absolutely legitimate. You are allowed to claim deductions for utility expenses as well as insurance in this regard.
6. Not maintaining the basis records
You're allowed to claim business losses in partnership or S corporations on your personal return only up to the permitted basis amounts. In order to claim for these losses, you also need to maintain the basic records.
Not sure how to figure the basis amounts for your business losses or gains? Go to Google and search for an "IRS lawyer near me" to help you with the basic amounts and records for your business.
7. Tax payments
Based on your business profile, you may be required to file estimated taxes. In such a case, you should be very careful and deposit all the taxes you're liable to pay. These may include self-employment tax, Medicare taxes etc. Don't wait to pay the estimated taxes until the time to file your income tax return. Late payment or underpayment of taxes can attract heavy penalties.
8. Not filing returns on time
Can't get rid of your habit of procrastination? Well, you better get yourself ready well ahead in time for filing income tax returns. Filing your returns past the due date comes with hefty penal interest rates. In case you can't file the return due to unavoidable reasons, you should try to seek an extension from the IRS office. Once you get an extended due date for filing the return, be punctual in filing it.
9. Filing incomplete returns
Income tax returns are required to be filed with all necessary forms and duly filled-up schedules wherever applicable. You may also have to file elections, statements or affidavits in a declaration of items included in your return. If you make a hasty filing missing out on the supporting paperwork and forms, your income tax return will be treated as incomplete by the IRS officials.