Avoiding the Top Tax Mistakes that Small Businesses Make

As we are halfway through the year, now is the best time to take action and avoid the most common tax mistakes that small businesses make. The following are some of the best practices to help your business avoid tax trouble.

Maintain Good Records

Mid-year is an ideal time to examine your recordkeeping habits. Good recordkeeping not only allows you to monitor the progress of your business but also provides you with the information you need to help you calculate and support your income and support your expense deductions. The better your records throughout the year, the less challenging the year-end tax preparation will be. Key things to consider:

• Maintain records needed to figure your income
• Keep records needed to figure your deductions (e.g., cancelled checks, receipts, other evidence)
• Retain records as long as you may need them

Report all your taxable income on your tax return.

Most income is taxable unless it is specifically exempted by law. There are many ways in which you receive your business income (e.g., cash, check, credit card, bartering, 1099 misc). Regardless of the form, business income must be reported on your tax return.  Remember, the IRS has established audit techniques to determine potential underreporting of income.

Keep Business Expenses Separate

There are several types of business deductible expenses. However, for an expense to be deductible, it must be necessary and ordinary in your trade or business. An expense is ordinary if it is common and accepted in your trade or business.  An expense is necessary if it is helpful and appropriate for your trade or business. Good recordkeeping dictates that, in addition to maintaining supporting documents (e.g., invoices), the record of expense should have adequate details to substantiate that the expense is necessary and ordinary (not personal expense) in the trade or business. In addition, if you keep your business and personal records separate, you will avoid future headaches concerning disallowed deductible expenses.

Top Three Expenses Looked at Carefully by the IRS

The following are the top three expenses that the IRS carefully looked at. To avoid tax trouble or paying interest and penalties for disallowable expenses, ensure that, in addition to maintaining adequate supporting documents/receipts, appropriate details for the following expenses must be recorded:

• Home Office Deduction

  If you have a home office, personal expenses are never allowed as a deductible expense. Business expenses must be kept separate, and good recordkeeping is necessary if you have a home office. There are certain requirements to meet to claim a home office deduction.  Check out the new guidance on IRS.gov.

• Auto Expenses

  If you use a vehicle for both personal and business, you need to keep track of the miles you drive for business as a basis for claiming a deductible business expense. You should also maintain a record of date, destination, mileage, and business purpose.

• Travel and Entertainment Expenses

  You should record who was in the meeting, the people entertained, the date, the location, and the business purpose.

Mid-year Review

Mid-year is a good time to revisit your bookkeeping or meet with an accountant to ensure you are in a better position for your year-end tax return preparation. Also, consider meeting with a Dallas CPA to review your year- to-date business financial position and devise strategies that you can follow for the balance of the year that are unique to your situation.