Top Three Tax Mistakes for Small Businesses
When it comes to finances and taxes small businesses are making common mistakes that can prompt an audit or leave money on the table, according to a new survey from Xero, an online accounting software company.
Xero polled 500 U.S. accountants to come up with the top three mistakes small businesses make. Top on that list: mixing business and pleasure.
Nearly half of the accountants surveyed said mixing business and personal expenses in deductions is the most common mistake businesses make. The worse part: according to survey respondents that mistake can trigger an audit by the IRS. A quarter of accountants cited excessive deductions to income as the most common mistake that could prompt an IRS audit.
Three in ten survey participants, or 29%, said small businesses are overlooking the home office deduction, which means they are leaving money on the table. If a small business owner works from home, even if it’s only part-time and passes the IRS rules then that business owner can write off part of the costs to operate his or her home. The home office tax deduction lowers the taxable income, reducing the amount the small business owes come tax time.
One in four accountants, or 26%, cited a lack of ongoing insight into the business’ financials as the most common mistake owners make. According to Simon Gray, an accountant in Xero’s network and managing partner of Gray Consulting, many small business owners only dive into their finances during tax time.
So what can small business owners do to stay on top of their finances and taxes?
According to Xero, it’s critical that the business owner looks over past financial statements, activity and sales data to see what worked and what didn’t so they can plan for the coming year. Xero says to get an understanding of the sales tax the company owes and keep the money in a different account to prevent the chance of an error.
Small business owners also have to know in real time what their bank balance is and look at it on a daily basis. Most banks have online banking and mobile apps that a small business owner can access quickly to keep on top of their balances.
Xero also suggests small business owners have a process in place to review the cash they expect to have and what payments are overdue so the business can immediately follow up on delinquent payments. Along with that, knowing the health of your customers is also key for a small businesses’ success. That means knowing the overall health and wellness of customers, their purchasing patterns and behavior and where all the customers stand on payments.
While ignorance is bliss, at the end of the day the small business owner has to be on top of their tax obligations and potential deductions. Yes the company’s accountant will know what a small company can deduct and can’t, but Xero says the small business owner should also take the time to understand their tax obligations and any changes from the prior year.
Planning ahead and meeting regularly with your accountant could mean you won’t be struggling to pay a big bill come April 15.