There’s nothing simple about tax preparation, but when you run a small business it’s easy to make mistakes. And while most mistakes are ultimately inconsequential, an incorrect tax filing can lead to an audit or even a lawsuit. That’s why it’s important that you have proper assistance in business tax preparation and that you, as a business owner, understand the red flags that can get your company in trouble.
Improper Entity Problems
One of the easiest ways to create tax complications for your business is to register the company incorrectly. There are several different corporate classifications, from sole proprietorships to S corporations and partnerships, and each bears a different tax burden. Classify your business incorrectly and everything that follows will also be incorrect.
Typically, if you classify your business at a higher level than appropriate, it’s an easy fix – you’ll have overpaid your taxes, not avoided them. That’s not what the IRS is concerned about. They’re concerned about tax crimes such as hiding expenses, fraud, and embezzlement. And one of the most common ways that businesses perpetrate this kind of fraud is by reporting excessive deductions.
Small businesses are allowed many deductions, but if your deductions are excessive, that will raise some red flags. It could be something as small as deducting too many business meals, travel, or even office space, but even if you think your deductions are valid, it’s best to be cautious. Home tax preparation software can help guide you, but in general, it’s best to have a CPA review your deductions for any problems.
You should also be careful to keep personal and business deductions separated. During the early years of your business, it’s easy to find these two mixing, especially if you use the same computer for business and personal purposes or have a home office, but if you mix them, you set yourself up for an audit or worse. You should also avoid lump miscellaneous deductions, as those are also suspicious to the IRS.
Finally, many businesses attempt to shift funds to non-profits toward the end of the year so they can take additional deductions. While donations are tax-deductible, the IRS frowns upon disguising income in this way. Plan your giving so that it fits your business’s mission, not to hide business income.
Seeking Legal Support
Just as you need a CPA to help you prepare your taxes, your small business should have sufficient legal support – and you shouldn’t wait until you’re already having legal troubles. A lawyer can help you properly structure your business and avoid tax problems in the first place. If you wait until you’re charged with a business-related tax crime, you’ll spend precious moments familiarizing someone new with your company. It’s simply better to have a lawyer involved to assist you from the beginning and who knows how your business works.
Ultimately, if you have proper support with the legal and financial aspects of your business, file your taxes on time and consistently, you’re unlikely to encounter serious tax problems – so proceed with this in mind. If you’re investing in business development, you need to go all in.