New businesses make mistakes that can cost them money, sometimes a lot of money. Here are the most common ones I see every year.
- Lack of good records – this leads to multiple errors, such as missing deductions, problems with cash flow, difficulties or procrastination in filing necessary tax returns including income taxes, sales and use taxes, payroll taxes, etc. I saw one company that had missed over $20,000 in deductions last year for this reason.
- Delayed tax filings usually result in tax penalties. You’ll also pay interest on any taxes that are paid late starting with the due date of the filing. As interest rates rise, this is becoming more and more expensive.
- A special case of late filing penalties involves the Federal income tax. The late filing penalty is 10x the late payment penalty. Even if you can’t pay, ask for an extension (we do Federal extensions for our clients at no cost at their request) but they have to be have to be filed before the due date of the return. The extension provides you another 6 months to file your return without paying the late filing penalty. However, interest will be assessed from the due date of the return.
- Late filings of pass-entity returns, such as S Corps or partnerships. These returns assess late filing penalties on a per month per shareholder or partner basis and can quickly run up big bills.
- Mixing business and personal expenses – it is necessary that any personal funds transferred to the business or payments received from the business be accurately recorded along with the purpose of payment, i.e., loans, contributions, income, reimbursements, etc. The new 1099-K reporting minimum of $600 (now delayed to next year) makes it especially important to document non-taxable income such as payments to and from friends or family.
- Not understanding the impact of income on the self-employment tax (SE tax) or the earned income credit. The SE tax is paid on business income even if there is no ‘ordinary’ taxable income after adjustments are made. The earned income credit varies depending on number of children and amount of earned income, including business income.
- Of course, many new business owners are unaware of many deductions and credits available to them or how to setup their business to take advantage of special deductions. Depreciation is a good example that is often wrongly used.
- Being nervous about using commonly available deductions such as business mileage or the home office expense. The business has a right to use these that is clearly enunciated in the tax code. It’s simply necessary to document them well in your records.
If you’re starting a business, come in and talk to us. We offer a free 30 minute business consultation that can get you off on the right foot.
Small business is a great thing. Take advantage of the opportunity. You’ll be the best boss you ever had.