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.
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.
“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
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.
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.
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.”