The Biggest Small Business Tax Mistake
Written by Ken Gaebler
Survey of professional tax preparers reveals the most costly tax mistakes made by entrepreneurs and small business owners.
Income taxes and small business ownership go hand in hand. Since you can't avoid paying the IRS, your best bet is to execute strategies and implement small business tax tips to reduce your tax liability and minimize the headaches you experience during a typical spring tax season.
But according to a new study by accounting software provider, Xero, many small business owners find that tax season only amplifies their inability to manage their finances and overall tax burden.
In a survey of 400 accountants and tax preparers, the biggest mistakes small business owners make at tax time are failing to keep financial records up-to-date and not preparing a budget for the year ahead. Other common tax mistakes include only talking to accountants at tax time and fundamentally misunderstanding their tax obligations to the extent that it excludes tax management strategies.
Nearly three out of four accountants (72%) said that they could deliver better tax counsel if they had a real-time view of their clients' financial situations--and a third of accountants indicated a willingness to offer discounts to clients that present a reconciled ledger at tax time.
Additionally, 42 percent of accountants recommended that small business owners meet with their accountants at least once a month and 63 percent advised entrepreneurs to prepare for tax season all year long by keeping their financial records organized and current.
Other study findings include:
- Excessive deductions, misidentifying workers (contractors vs. employees) and home office deductions were cited as the most common triggers for IRS audits.
- The most frequently overlooked deductions on small business returns are out-of-pocket expenses, auto expenses and depreciation.
- The strangest items entrepreneurs have attempted to deduct include family vacations, pet expenses and deadbeat relatives.
Financial recordkeeping can be time-consuming. But the bottom line is that entrepreneurs who invest resources in accounting solutions and bookkeeping activities ultimately save time and money during tax season.
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