Top 5 Mistakes DC Businesses Make at Tax Time
You worked hard in your business - even managed to turn a profit. The last thing you want to do is give that profit to the IRS. Yet every year, small businesses in America make mistakes on their taxes that cost them plenty. Here are five of the most common mistakes DC businesses make at tax time.
Taking too many deductions.You cannot deduct regular living expenses for yourself and your family just because you are a business owner. Admittedly, some people do this, but when the IRS catches up with them, the back taxes, penalties, and interest will add up to far more than they tried to write off on their taxes.
People tend to skirt the rules most on meals, travel, and entertainment, claiming personal expenditures like family vacations as business deductions. The IRS has seen this go on for years, which is why they will put those deductions under a microscope. If you want to increase your chances of getting an IRS audit, go overboard on your deductions for meals, travel, and entertainment.
Not taking all the legitimate deductions.Businesses miss out on deductions they can and should claim to save a bundle on their taxes. One way to keep this from happening is to create a taxes folder on the desktop of your computer and a physical file folder. Dump a copy of digital information on deductions into the desktop folder and a paper copy into the physical file. Doing this throughout the year as you incur costs will make sure nothing slips through the cracks, and it will make tax time far less burdensome.
Use financial management software that categorizes your costs in real time and can print a report to sort out what is deductible and what is not. With that report, your tax preparer might find deductions that had not occurred to you. Use an excellent tax preparation software package or a top-notch tax preparer who focuses on businesses as another way to maximize your business deductions.
Hiding income.You might think that the IRS cannot find out how much money you made if you are an independent contractor with lots of small fee work or if you get paid in cash. As a result, it might be tempting to hide some of your income from the taxman. A word to the wise: the IRS knows which businesses fall into these two categories, and they pay close attention to the amount you report.
If you are living in a 10,000 square foot house, have several luxury cars, and spend money like it is rain through your fingers, yet claim very little income, eventually, the IRS will come knocking on your door. The longer you hide income, the more you will have to pay in back taxes, penalties, and interest.
Lack of organization.Your accountant cannot find a deduction for which you kept no record. Staying organized throughout the year as outlined above will go a long way to saving you money on your taxes, but if you are disorganized in other ways, it can cost you. Make sure you gather all the end-of-year statements before shipping off your bundle of paperwork to your tax preparer. If you cannot substantiate a business expense by keeping contemporaneous records, such as a log of business miles driven, the expense is not deductible.
Look over your previous year*s tax return to see all the statements you need. Make a list of these documents and store it in your desktop folder and a physical file. Use the list to speed up the document-gathering process and as a final checklist. Every year you can consult the list and, if necessary, add or delete items.
Confusing a hobby with a business.If you like to draw, but you have never sold a drawing, you cannot call your artwork a business to claim deductions. Even if you do make some income, the IRS will consider it a hobby if you do not turn a profit in most years. If you cannot convince them that you are working hard to make money and that your venture is on the way to becoming profitable, they will disallow all those lovely business deductions you took.