09 Oct Common Tax Mistakes for Small Businesses
Common Tax Mistakes for Small Businesses
Knowing these rules can help avoid missing deductions or having them disallowed during an audit.
1. Not saving receipts of less than $75 for meals and entertainment. Although the receipts are not required, records must show required information including persons (or number of persons) involved, amount, date and time, place (name and location), and business purpose, i.e. who, what, when, where, and why.
2. Forgetting to track reimbursable (out of pocket) expenses. Many small business owners routinely pay for business expenses from their own funds (cash or credit cards) when convenient. Records should be kept and submitted to the business for reimbursement regularly.
3. Not keeping records (and limiting amounts) of business gifts. Business gifts are limited to $25 per recipient per year. A married couple and partners of a partnership are each considered one person. Employee gifts for length-of-service or safety achievement cannot exceed $400 unless established under an established written plan that does not discriminate in favor of highly compensated employees, where the maximum is $1,600. You should keep records to support who received business gifts.
4. Including purchase of fixed assets as supplies. Although Sec. 179 expense election is available for most purchase of fixed assets, that deduction is not allowable unless properly reported on the tax return. For tax years after 2013, the amendment of a Sec. 179 election will no longer be allowable after a return is filed.
5. Failing to elect out of bonus (special 50%) depreciation. Bonus depreciation is taken automatically unless the “election out” is made for each (or all) class(es) of qualifying property. The election out should be made on a timely filed return, but can be done on an amended return within six months of the original due date, provided all affected taxpayers are also amended. Once the election out of bonus depreciation is made, it cannot be changed without IRS permission.
6. Failing to maintain or properly report automobile usage. Vehicles owned by a partnership or corporation should deduct all related actual expenses and report the personal use of company vehicles as a taxable fringe benefit using one of three valuation methods. Business use of a personal vehicle may be reimbursed by the business or deducted as an employee business expense by the employee on form 2106 using one of several valuation methods.
7. Erroneously classifying a hobby as a business. Unless the activity is expected to produce profits on a regular basis, consult with your tax preparer BEFORE engaging in the activity.
8. Treating employees improperly as independent contractors. This has always been a hot issue with IRS and with the additional questions on tax returns concerning filing of Form 1099s, IRS is continuing to search for these businesses.
9. Failing to respond to EVERY IRS notice. The worst thing one can do is to allow the IRS to escalate their efforts when you fail to respond.
10. Failure to file tax reports if you cannot pay. Failure to file penalties are ten times higher that failure to pay penalties. Do not incur this extra expense when you are already unable to pay taxes when due.
11. Using tax trusts funds (sales tax collected and payroll taxes withheld) for other business purposes. When cash is tight, ALWAYS include these tax payments at the top of your list.
12. Overpaying taxes (through withholding or estimated tax payments) during the year, creating an interest -free loan to the government. Reduce your withholdings or estimated tax payments, but put the savings in your savings account.
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***The tax information contained in this blog is only current through 12/31/2013.