Most businesses have some tax problems at some point. It can be hard to know what counts as a deduction and what doesn’t. What type of documentation do you need to keep? Can accounting software help?
While it may seem grim, that’s not reality. With the right tools, you can make the most out of tax season and even save money! Here are some common tax problems you should avoid, and some tips to do better!
- Not having the correct documentation
- Using business funds for personal expenses
- Not understanding deductions
- Not filing in time
- Trying to manage tax season all by yourself
Not having the correct documentation
Most tax problems for small and large businesses alike can be solved with proper documentation. Not having the proper documentation can lead to your business overreporting expenses or underestimating taxes owed. Not only that, but without proper documentation, the IRS will audit you if they find suspicious activity on a tax filing. Try tracking business transactions such as:
- Deductible expenses
- Material expenses
- Marketing expenses
- Asset acquisitions
- Bank account statements
- Cash flow statements
- Any receipts of transactions
- Payroll
- Inventory purchases
- And More
Having this information when filing your taxes makes the process straightforward and concise. Proper tracking of expenses can be done by accounting software or a by CPA firm. Even if you decide to hire a CPA, it is in your best interest to have software that automatically tracks most of this information for you. Again, not having the proper documentation can leave you liable to an audit and investigation into your expenses. Keep on top of your accounting!
Using business funds for personal expenses
One of the common tax problems that happen to small businesses is spending business funds on personal expenses. This is a classic mistake that many businesses can make if they are not careful. To state the obvious, this is where documentation comes in. If you can show that your spending was related to your business you’re in the clear. If not, you can be liable for some major penalties.
Using business funds to pay for meals or go on “vacation-like” trips is not acceptable to the IRS. On an even more practical level, you need to institute some safeguards as noted by Accion on their blog:
“…you must open a separate business bank account, and you should use a business credit card when making purchases for your company. If you are using any of your personal assets for a business, such as your car or a home office, it’s imperative to keep detailed records to be able to support any deductions you take. You can’t deduct what you can’t document!”
Using separate bank accounts and credit cards is going to help you showcase the difference between personal and business expenses. It also makes expense tracking easier.
Not understanding deductions
Deductions are a key part of filing your taxes and are dependent on the company structure you have filed as. Whether you are a sole proprietor or LLC, you want to maximize deductions for your business. Make reports and notes about any expenses related to:
- Marketing
- Travel
- Employees
- Software
- Machinery
- Purchases and maintenance
- Lunch expenses
- Phone and Internet expenses
- Rental fees
- Bank Fees
- And more!
Maximizing your deductions properly is the best way to pay the least in taxes while making sure you are following the law. You can try and do this yourself, or you could have a CPA firm represent you to the IRS in case you should ever be audited.
The IRS also has a running list of records you should keep.
Not filing on time
Another common tax problem that plagues businesses is not filing taxes on time. Due to a lack of planning, frustration, fear, and missing documents, businesses often miss the tax filing deadline. Not to mention, unusual circumstances, such as what happened in 2020 with the tax filing deadline being extended until July.
However, this is one of many tax problems that can be solved easily. Whether for your personal taxes or your business taxes, you can ask the IRS for an extension of time. This will give you more time to get your documents in order and not be penalized.
Trying to manage tax season all by yourself
There is no getting around it, taxes are complicated. Almost all tax problems can be solved with the help of a CPA. Even if you stay on top of your documentation and take the correct deductions, you can still find yourself audited. The right CPA firm can help you max out your deductions and set you up for success throughout the year.
Not only that, but they can represent you should you ever be audited. With a CPA firm, you are always protected.
Are you considering getting help with filing taxes this upcoming year? Do you have multiple assets and liabilities, but want to get the most out of your deductions? At Sheffield, Trackwell, and Rapp we can help you. You can rest easy knowing that your taxes are being done by industry leaders and you are prepared for tax season! Contact us today to see how we can help you!
