As tax season quickly approaches, business owners are preparing their documentation with great care. While no one wants to file an inaccurate return, mistakes can and will happen. In fact, many mistakes can be avoided when business owners have the right information at their disposal. Doing so will stave off costly penalties, as well as prevent a damaging audit from occurring down the line.
According to the U.S. Small Business Administration, integrating separate accounts can quickly spell disaster for business taxes. It can be all but impossible to sufficiently keep track of expenses when business and personal funds are kept in the same accounts. In the same token, proper record keeping can have an impact at tax time. This entails keeping receipts for all expenses, which must be turned over to the IRS upon request.
Improper use of deductions can also land a business in hot water. Businesses must ensure they are deducting the right percentage of things like meals and other expenses. While many business owners assume they can write off 100 percent of an expense, in many cases deductions are much less than the total. Deductions for mileage can also be difficult to manage, as they are dependent on where the trip begins and ends, and how much of a deduction is allowed in a given year (in 2014 workers could write off 56 cents per every mile traveled).
Being ignorant to certain tax codes is equally damaging, as stated by the IRS. For instance, independent contractors are obligated to withhold their own taxes (unlike employees, whose taxes are automatically deducted). In this instance, taxes that aren’t withheld throughout the year must still be paid in full on the tax deadline. Failure to do so will result in fines and penalties, which can add up quickly.