When filing taxes on your business each year you must do all you can to ensure that you don’t make mistakes that can result in higher taxes than you actually owe or get the Internal Revenue Service’s attention. To help you out, we thought it would be useful to put together a brief article discussing common mistakes that small businesses make when filing their taxes. If this is something that you’re interested in learning more about, here are five mistakes you should avoid.

Misreporting Income

There are special rules for how much income you report on your tax return. Some income, such as nonemployee compensation for an independent contractor or for a service provider who is paid by a third party, is reported on Form 1099-MISC (or Form 1099-NEC after 2019). If you receive certain types of payments, such as credit card payments or payments made to certain types of businesses, such as investment advisors and broker-dealers, that are reported on Form 1099-K, they may also be reported on a Form 1099-MISC (or Form 1099-NEC after 2019). If you have too much income reported by Forms 1099 and do not have the opportunity to correct the forms, you must report the correct amount of income on your tax return. 

Failing to Utilize Retirement Plans

Tax-deferred contributions, like contributions to qualified plans, help you save for the future, but with current tax savings. Retirement plan choices include SEPs or simple employee pensions. If you don’t yet have a plan and want to set one up by the filing due date, you can make a contribution to that plan for that year. In addition, you might qualify for a tax credit.

Not Keeping Basis Records

Business losses that are passed on from a partnership or S corporation pass-through entity can be claimed on personal tax returns only up to certain limit amounts. For example, a shareholder's loss deduction is limited to the amount of stock basis and loan basis he/she has in the S corporation. Without these records, these losses will be lost forever. Similarly, the amount of gain on the sale of business property is not the amount received from the sale; it is the amount received minus basis in the property. The basis is usually the cost of acquiring the property, which is reduced by depreciation and increased by capital improvements.

Overlooking Pre-Opening Expenses

If you just started up your business, you may be able to take a deduction for your startup costs. This is a tax deduction you can claim for your business--that is, you can use the $5,000 to reduce the total taxes you pay. Take note that special rules apply if your startup costs exceed $50,000.

Combining Personal and Business Finances

If you put personal and business expenses in the same set of books, it’s easy to overlook deductions for your business or treat your personal income as business revenue. Set up a separate account at your bank and use a separate credit card for your business expenses to keep things neat.

Conclusion

We hope this article proves to be useful when it comes to helping you avoid making mistakes when filing taxes. While filing taxes may seem difficult, it’s not something that you can’t overcome as long as you know what you’re doing. Be sure to keep everything we’ve discussed here in mind so that you can make the most informed decision when filing taxes.

If you need more help with your taxes, then you’ve come to the right place. Tottax helps optimize taxes for all kinds of professionals. Connect with us for personalized bookkeeping services in Denver.