Every business owner wants to save money at tax time. But doing so often begins much earlier than your springtime tax preparation appointment. Daily bookkeeping mistakes can become costly if not caught and resolved quickly. What are some of these tax-related mistakes that your company should avoid at all costs? Here are four of the most important.
1. Not Categorizing Well
How you categorize income and expenses can have a big impact on deductions and how income is reported. Not all expenses are deductible against your taxable income. This includes personal expenses, contributions in certain business entities, or certain types of owner compensation.
On the other hand, some expenses — such as capital purchases — must be deducted according to IRS rules. If you haven't recorded these and other costs correctly throughout the year, you could run afoul of the IRS or wind up overpaying taxes.
2. Missing Tax Deadlines
Most businesses have to deal with many different types of taxes. In addition to corporate or pass-through income taxes, you may also owe sales tax, payroll taxes, excise taxes, fuel taxes, and specialty taxes.
Each of these has different rules and deadlines. The bookkeeper must be on top of these regulations and remit what is owed on time. Otherwise, your company will likely pay significant penalties and interest.
3. Failure to Document
The IRS requires that each company be responsible for its own backup documentation. Even if you aren't required to attach proof of income and deductions with your tax return, it must be available if the IRS or state agencies review your return. If the bookkeeping staff has not kept sufficient records to back up what's on the return, it will likely be disallowed and may even result in penalties or further audits.
4. Mishandling Payroll
Do you have any employees, including owners? If so, the company is subject to another level of scrutiny and regulations. Mishandling the classification of employees (vs. independent contractors) or incorrectly calculating payroll taxes could get the business in trouble with an array of state or federal agencies, including the IRS and Social Security Administration.
Clearly, the work of the bookkeeper throughout the entire year sets up your company for more success or costly expenses when the taxes are finally calculated. By avoiding these and other mistakes, your tax preparation will be quick, accurate, and less expensive. Learn more by consulting with an experienced bookkeeping service in your area today.