Common Tax Mistakes to Avoid as a Small Business Owner
For small business owners, filing taxes can feel like navigating a minefield, with even higher stakes due to the increased risks and potential penalties. Even the smallest tax mistakes can lead to costly penalties, audits, or worse, legal challenges. Navigating tax season effectively without making any tax mistakes requires awareness of the common errors businesses make and how to avoid them. In this article, we explore tax mistakes that small businesses often make, backed by up-to-date research and expert advice to help you stay on track.
1. Inaccurate Income Reporting
One of the most frequent tax mistakes small businesses make is the misreporting of income. This could range from failing to report all revenue streams to incorrectly categorizing income types, such as mixing personal income with business revenue. Any mistake in income reporting can trigger audits or result in severe penalties.
Why it matters:
Prevention Strategies:
- Track Every Transaction: Keep a detailed log of each crypto transaction, including the date, amount, and fair market value at the time of exchange or sale.
- Use Crypto Tax Software: Leverage platforms like CoinTracker or Koinly that integrate with exchanges to automate tracking and reporting, ensuring accuracy.
- Consult a Tax Professional: If you’re involved in cryptocurrency transactions, it’s crucial to consult with a tax professional experienced in digital assets to ensure you’re compliant with IRS reporting requirements.
7. Not Taking Advantage of Available Tax Credits
Small businesses can save a lot of money on taxes by claiming various tax credits, but many business owners miss out on them. These credits, like the Research and Development (R&D) Tax Credit or the Work Opportunity Tax Credit (WOTC), are meant to help businesses save money for doing certain activities, like creating new products or hiring people from specific groups. Not claiming these credits means businesses could end up paying more in taxes than they need to.
Why it matters:
Tax credits are a way to directly reduce the amount of tax a business has to pay. For example, businesses that invest in sustainable practices may qualify for green energy credits, or might be eligible for the R&D Tax Credit, but many businesses don’t apply for it, missing out on potential savings. This means businesses could pay more in taxes than they should.
Prevention Strategies:
- Stay Informed: Make sure you know about the credits available to your business. Websites like the IRS and other tax resources often provide updates on new or existing credits.
- Get Help from a Professional: A tax expert can help you avoid tax mistakes by determining if your business qualifies for any credits and ensuring they are claimed correctly.
- Check Credits Every Year: Tax credits can change, so it’s a good idea to look over them every year to ensure you don’t miss any new opportunities.
8. Overlooking Tax-Free IRA Rollovers & Mixing Up Tax-Exempt with Taxable
When managing retirement accounts, mistakes involving IRA rollovers are more common than you might think. A typical error occurs when a tax-free IRA rollover is mistakenly entered as a taxable distribution, leading to unnecessary taxes and potential penalties.
Why it matters:
The IRS treats rollovers differently than regular withdrawals. If you roll over funds from one IRA to another and mark it as taxable income, you’ll end up paying taxes on money that you don’t owe taxes on because rollovers are typically tax-free if done correctly. This mistake could trigger both immediate taxes and penalties. Even though tax software can help prevent some errors, it’s crucial to carefully review all the information before submitting.
Prevention Strategies:
- Double-Check Your Forms: Carefully go over the distribution forms for your IRA rollover. Ensure you don’t place the tax-free rollover amount in the taxable section by mistake.
- Verify Entries in Tax Software: Tax software can flag potential errors, but you should always cross-check your final return. Confirm that every detail is in the right place, especially with rollovers.
- Consult a Professional: If you’re unsure about how to handle your IRA rollover, consider reaching out to a tax expert. They can help you avoid costly mistakes and ensure you’re following all the IRS rules correctly.
Running a small business is tough, and tax season can make it feel even harder. It’s easy to make mistakes, and even small ones can cause big problems down the road. But you don’t have to go through it alone. Understanding these common tax pitfalls and taking the right steps now can save you from stress, unnecessary penalties, and lost opportunities.
At nVest Advisors, we truly care about the success of your business. We understand the challenges small businesses face, and we’re here to help you navigate through all of it without all the confusion and worry. Whether you need guidance on keeping your finances separate or making sure you get every tax break you’re entitled to, we’re here to support you every step of the way.
If you’re ready to tackle tax season with confidence, book a meeting with us today. We’re excited to help your business thrive!