3 Steps For Small Business Owners To Avoid Common Tax Mistakes

For many, it is not the most wonderful time of year. Whether you do your own taxes or get professional help, tax time is usually a stressful time. This is especially true for small business owners and founders. Small business owners have enough to manage with their business throughout the year, but come April they need to organize and manage a massive amount of information. Between tracking revenues and expenses, estimating tax deductions and credits and the filing process, it’s no wonder so many make mistakes at tax time.

Luckily there are professionals who can help business owners avoid making common mistakes and maximize their returns. Shiloh Johnson, MST, CPA, built ComplYant to help small businesses and founders navigate their taxes. She has seen first-hand the stressful outcomes when people don’t understand tax requirements. She said there are three steps in tax preparation that can help business owners and founders avoid common tax mistakes.

Step 1. Gather the paperwork

“I’m going to start out with something basic.” Johnson begins. “One of the most common mistakes I see is not gathering the paperwork. It sounds so simple, but just tying up all the places we make transactions is incredibly complex.” She explains that the modern way we do business means there is no ‘one place’ where all our transactions live. We have multiple cards and accounts used for expenses, and accept payments in several places like Venmo, checks or cards.

She explains that gathering all your paperwork in one place, including income and expenses, is a critical first step – even if you don’t know what to do with this information. It’s important to record and report all of the income you earned, because leaving out any part of your income can prompt an audit by the IRS. Just as important is to gather all of your expenses. Unlike income, you don’t have to report expenses. Reporting your expenses only benefits you, and every little bit helps.

Step 2. Sort the information

Another costly mistake she sees each year is not separating personal and business spending. Johnson explains that if you don’t separate your business expenses from your personal ones, you often can’t claim them. She recommends that even if if this is a side hustle, you should “Fake it ‘till you make it and pretend it’s a real business. Set up a separate bank account that is only for business expenses. Then sort your transactions into three categories:

• Big money spent: This can be whatever a ‘big amount’ means to you. If it’s anything over $1000, then include those expenses in this category. She says it’s important to separate this out because often a big expense, like a new car or computer for work, can be treated specially at tax time through depreciation.
• Little money spent: This is typically your business related expenses like travel and meals, and supplies. Again, count every dollar of this.
• Money in: Count every dollar you made from your business in this category.

Step 3. Accurate Categorization

Johnson says most business owners tend not to take everything they can deduct. They are often too conservative because they are worried about being audited. “The tax code is meant to encourage business owners and entrepreneurs. Take advantage of every dollar you spend on your business.”

Step 4. Hire a Professional

What people often don’t realize, according to Johnson, is there are several tiers of tax professionals, and it’s important that business owners hire the right one. “Often people will hire bookkeepers because they’re cheaper, but they aren’t actually qualified to do taxes.” Johnson explains. “Per the tax code, the only professionals that are actually allowed to submit taxes on your behalf and defend you are enrolled agents, CPAs and tax attorneys.” Even more confusing is business owners may hire an Accountant who is not actually a CPA. So while they may have a lot of experience, they aren’t licensed to submit your taxes. Another unfortunate issue she’s run into is fraud at the bookkeeping level. She stresses it’s really important to review the numbers with your bookkeeper each month. “In a perfect world, you have a bookkeeper who helps you organize your information, then send that information to a CPA who will help plan your tax strategy and file on behalf of you.”

For more information on tax strategies, visit ComplYant.

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