You’ve probably heard the old saying: “In this world nothing can be said to be certain, except death and taxes.” Taxes may be unavoidable, but with the right strategies you can work to minimize your tax burden and save as much money as possible.
Here are the top 10 tax mistakes made by small business owners—and ways you can save money by avoiding them.
1.)Doing it yourself. The federal tax code is tens of thousands of pages long, with hundreds of complicated industry-specific items. If you really want to maximize deductions you need an expert. Besides, your focus should be on growing your business, not learning the minutia of the tax code.
2.)Using the wrong legal entity. If your small business has grown but you still have a sole proprietorship designation, it isn’t helping you. Sole proprietorships are one of the most audited business types. Different entity designations allow for more deductions in some scenarios, and also allow for greater legal protection.
3.)Mixing expenses. Too often small business owners do not correctly distinguish personal expenses from business expenses. It may not seem like a big deal to forget the odd expense here and there, but they add up quickly—costing you money and potentially triggering unnecessary audits.
4.)Not properly classifying employees. The rules for classifying employees and independent contractors aren’t as vague as you would think. You should ask yourself: n Do you dictate how, when and where the person works? Do you reimburse their expenses or provide supplies or tools at no cost to them? It’s important that you get the classification right and treat them appropriately from a tax stand point.
5.)Not properly deducting startup expenses. The IRS allows up to $5,000 of startup expenses in the first year of business, yet this is one of the most frequently missed deductions. You’re also allowed up to $5,000 for organizational expenses, such as having the proper legal entity for your business. That’s $10,000 in deductions in year one!
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