How To Avoid Business Tax Filing Errors

Staying proactive and detail-oriented can help you avoid the most common inaccuracies on your business taxes. Easily avoided mistakes are surprisingly common. These errors include providing an incorrect Social Security number, making math errors or entering the wrong bank information. Such mistakes can delay your refund or even cause funds to be deposited into the wrong account. It’s also important that your choice of tax entity — sole proprietorship, LLC, C Corporation, S Corporation, partnership or nonprofit — reflect your legal business structure. Above all, don’t forget to sign the return.

Deductions

Many businesses miss the opportunity to take deductions. Commonly overlooked deductions:

• Business magazine subscriptions, marketing materials and postage
• Home office expenses
• Accounting and bookkeeping fees or software
• Tax preparation costs
• Vehicles used for business
• Insurance premiums
• Travel and meal expenses

Some start-up expenses are deductible. Specifically, the IRS allows businesses to deduct up to $5,000 in start-up costs and $5,000 in organizational costs in the first year, provided total start-up costs do not exceed $50,000. If start-up costs exceed $50,000, the first-year deduction is reduced dollar-for-dollar by the amount over $50,000. Any remaining costs may be amortized over the next 15 years.

A start-up cost is deductible if it meets both of the following requirements:

• It’s a cost a business could deduct if they paid or incurred it to operate an existing active trade or business, in the same field as the one the business entered into.
• It’s a cost a business pays or incurs before the day their active trade or business begins.

Start-up costs include amounts paid for the following:

• Investigatory expenses (e.g., surveys, travel to secure suppliers or customers)
• Organizational expenses (e.g., accounting and legal fees, incorporation costs)

Deductible interest, taxes, or research and experimental costs are not considered start-up costs.

Reporting on income and staff

Errors in income reporting can trigger audits or fines. First, you should avoid over-reporting sales tax by subtracting sales tax paid during the year from your total income. Next, be careful that you include as income the proceeds of any sale of business equipment, even equipment that you no longer needed. Finally, ensure that Forms 1099 from investment accounts match what you claim, listing all income correctly.

The IRS has strict rules for determining whether someone is an employee or an independent contractor. Misclassification can result in significant tax penalties. The IRS provides specific guidelines to determine worker status, focusing on behavioral control, financial control and the relationship of the parties.

Pay on time and keep organized records

Timely tax payment is required. Form 7004 can provide a filing extension if needed; however, there is no extension for paying taxes. If you can’t afford to pay your taxes immediately, you will need to arrange a payment plan with the IRS. Also note that businesses expecting to owe $1,000 or more in taxes are generally required to make quarterly estimated tax payments to avoid penalties.

It is essential to maintain and retain accurate bookkeeping records and supporting documents to substantiate all your claims, from deductions to income reports to hiring. Organized records prevent missed deductions and reduce processing delays. Keep business and personal expenses separate by using distinct accounts.

Final tips

Taking extra precautions can help you avoid costly errors:

• Double-check calculations, especially when dealing with complicated figures.
• Stay informed about changes to tax laws that may affect your deductions or credits.
• Don’t overreach by claiming ineligible deductions, as this could lead to audits or penalties.
• Ensure all necessary paperwork is included.

Rules can change over time, often with little warning, and other provisions may also apply, so be sure to work with professionals who are up to date on the latest details. A qualified accountant can help with accuracy and compliance, while also maximizing deductions.