Small-business owners may get into trouble with their business taxes for a number of reasons. But the main culprits may not be what you think.
You might be tempted to chalk up the majority of tax troubles to financial difficulties, or problems that arise when a business is a victim of theft.
In most situations, however, a small business's tax troubles can be attributed to just two reasons—and they're often related.
- Poor record-keeping and bookkeeping
- Not understanding the complex tax rules well enough
Bookkeeping Gone Wrong
A business's tax problems often start with lapses in record-keeping and bookkeeping. Disorganization and inadequate records may lead business owners to overspend or make other poor judgment calls. Then, when tax time rolls around, records that are needed to properly account for a business's income and expenses aren't organized—or even available. For overwhelmed business owners, the task seems too big to straighten out, so they give up and simply guess rather than using the proper paperwork to estimate their tax liabilities.
As attorney David Rowe writes on his firm’s website: “Business owners run into major problems when they do not track business income and expenses on a regular basis. A business should have a system for tracking income and expenses by category. This system should be reconciled to the business’s bank statements each month."
In addition to not keeping good records, business owners may make tax mistakes because they just don't understand the tax rules that apply to their business. Every year, it seems understanding your tax liabilities gets harder, as local, state and federal codes get more complicated and governments pass more tax laws. For instance, the Affordable Care Act ushered in new record-keeping and compliance requirements for some small businesses, especially those with more than 50 employees.
A notice of a tax infraction requires business owners to spend time and effort investigating the issue, gathering records and resolving the matter with the IRS or appropriate tax authority. They may also need to hire legal counsel or a tax accountant.
Solving Your Tax Problems
The good thing about understanding the two biggest reasons business owners make tax mistakes is that they're both largely preventable.
After you set up an accounting system that's easy to follow, it’s often even easier be disciplined about keeping key records:
- Keep track of invoices and receipts, as you'll need them to document your finances.
- Reconcile bank statements and credit card records regularly, so your bookkeeping matches your actual financial situation.
- Update your accounting records on a regular (at least monthly) basis.
Falling behind may make it more difficult to keep accurate records—a neglected bookkeeping system may become like a snowball rolling downhill, picking up more problems as it goes.
The following points may all make a difference in understanding, recognizing and meeting your tax obligations:
- Using an experienced CPA firm or accounting software package;
- Hiring an outsourced payroll company that’s financially solid;
- Doing business with financial institutions that provide good detailed records of transactions;
- Hiring a tax adviser or tax filing firm.
may all make a difference in understanding, recognizing and meeting your tax obligations.
Read more articles on taxes.
The information contained in this article is for generalized informational and educational purposes only and is not designed to substitute for, or replace, a professional opinion about any particular business or situation or judgment about the risks or appropriateness of any tax strategy or approach for any specific business or situation. THIS ARTICLE IS NOT A SUBSTITUTE FOR PROFESSIONAL TAX ADVICE. The views and opinions expressed in authored articles on OPEN Forum represent the opinion of their author and do not necessarily represent the views, opinions and/or judgments of American Express Company or any of its affiliates, subsidiaries or divisions (including, without limitation, American Express OPEN). American Express makes no representation as to, and is not responsible for, the accuracy, timeliness, completeness or reliability of any opinion, advice or statement made in this article.
This article was originally published on January 19, 2015.