December 15, 2016

Colorado Tax AttorneysSmall business owners all too often don’t fully understand the tax advantages and write offs they have available to them. They also often make mistakes that wind-up costing them if they ever get audited by the IRS. Below are five some common tax mistakes that could save your business money or prevent you from getting in trouble with the IRS.

1. Failing to write off expenses for a startup

If you are a new business owner, you need to know that you can write off several expenses incurred even before officially opening your business. Deductible capital expenses include the cost of surveying markets, product analysis, visiting possible business sites, labor supply, and expenditures of a similar nature, as well as the costs of getting a business ready to operate such as employee wages and training, advertising, and consultant fees. Note that you can only claim these expenses if your research and preparation ends with a successfully formed business.

2. Mixing personal and business expenses

A number of small business owners tend to use one bank account for both personal and business-related expenses. While doing this may seem a lot simpler, the reality is that mixing business with pleasure will make life much more complicated for you later on. Doing so could get you into hot water with the IRS as the agency sees to it that only business expenses are deducted for tax purposes. Keep your personal and business-related funds in separate accounts. If you absolutely need to use your business credit card for personal expenses, don’t claim them on your taxes!

3. Forgetting the small stuff

Small business expenses such as educational classes, magazine subscriptions, and petty cash purchases can add up quickly. Be sure to keep track of all these expenses—no matter how minor they seem—and ask your tax professional about what you can and cannot deduct.

4. Not taking advantage of your MERP

Does your spouse work with you? If you don’t claim your spouse as an employee, that means you aren’t taking advantage of the medical expense deduction available through the MERP or Medical Expense Reimbursement Plan. With a MERP, you can pay for the medical expenses of your spouse, your other employees, and even your children that aren’t covered by insurance—tax free. While she doesn’t need to be a full-time employee, there must be proof that she works with you, and must have proof such as a paper trail and time sheets.

5. Not filing or paying taxes on time

Did you forget the tax deadline or lack the cash on hand to pay your taxes? Many small businesses make the mistake of filing or paying their taxes late. Filing late results in a failure-to-file penalty that increases until your return is finally filed. Paying late also allows the penalties to pile up, as the IRS typically adds anywhere from 0.5 to 1 percent per month for income tax reports that are paid past the deadline. When possible, settle your tax bill before the deadline. If this is not feasible, ask for a filing extension or consider setting up a payment plan with the IRS.

Categories: Business Tax Issues, Uncategorized