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January 25, 2010

Avoiding Small Business Tax Mistakes

Avoiding Small Business Tax Mistakes

Summary

Some businesses push the envelope when it comes to properly reporting their taxes, while others make genuine mistakes because they’re unawar

Some businesses push the envelope when it comes to properly reporting their taxes, while others make genuine mistakes because they’re unaware of changes in tax law.  Regardless of the intent, it’s important for every business to follow the rules when it comes to filing their taxes, or they could face a bruising audit in the near future, says Larry Rice, director of strategic consulting at Rodman and Rodman CPAs in Newton, Mass. 


Here are four common small business tax mistakes and how to avoid them.

1. Misclassifying employees

Many employers mistakenly believe that if an individual and their employer mutually agree that the worker should be considered an independent contractor, that’s how they will be classified, says Rice. 

“But the IRS looks at the law.  If the company controls what that person does, when they do it, and how they do it, chances are that person is an employee as far as the IRS is concerned,” he says.

If an individual is an employee, their company is then responsible for employment taxes and other obligations, such as payroll and worker’s compensation, says Rice.

If you are not sure about the correct classification of one of your workers, you can fill out IRS Form SS-8, which allows you to describe the worker’s circumstances.  The IRS would then review the document and officially determine their status.  (Either the company or the worker can choose to fill out Form SS-8).

2. Not keeping detailed receipts

Most owners know that employee business expenses may be deducted if they’re ordinary and necessary, and there is documentation to support the expense, says Rice. 

However, many owners don’t realize that it’s not enough for them to require their employees to provide receipts, especially for travel, entertainment and meal expenses.  They must also ensure that employees  write the business purpose for the expense on that receipt, as well as the names of participants and the meeting location, says Rice.

“We have seen a recent crackdown from the IRS in requiring proper documentation.  They may not have a problem with where the money is spent or why, but in an audit, they may decide that your company can not deduct an expense if you don’t follow the technical rules about documenting it,” says Rice.

3. Not taking advantage of new NOL rules

In the past, if your small business had a net operating loss (NOL), it could be carried back two years to off-set taxes paid on previous profits, says Mark Luscombeprincipal analyst for the tax and accounting group at CCH, a tax research and information provider in Riverwoods, Ill. 


Last year, eligible small businesses (with gross receipts averaging less than $15 million over the previous three-year period) were given the opportunity to extend the carryback period for up to five years.

Struggling companies that didn’t take advantage of this new rule may have missed a chance to claim a larger refund, which would have provided an infusion of cash, says Luscombe.

The headlines have passed for 2008, but a new law extended the option for the 2009 tax year, and also allows many medium size and large companies to participate, too.

4. Taking unapproved home office deductions


A common mistake business owners make in their personal returns is deducting expenses related to a home office while keeping a separate office on the company’s premises, says Rice. 

According to IRS rules, an employee can only take a home office deduction if it passes certain tests, such as being the principal place of business and being used for the convenience of the employer.“If the IRS analyzes your business returns and sees that you have business rent expenses, and then looks at your personal returns and finds you’re taking a deduction for a home office, that deduction may not be allowed,” says Rice.

Overall, the best way to reduce errors that can catch the attention of the IRS is to consult with a good tax accountant who can offer specific guidance to your company, and to make sure your paperwork is current, says Rice.  “Keeping good records isn’t just good for tax time,” he says.  “Ultimately, it will help you run your business better.”