The Most Common Small Business Tax Issues and Their Solutions
- August 22, 2019
- Posted by: BenG-Admin
- Category: Blog, IRS, Taxes
Tax issues can be daunting for large corporations, but small businesses always have to be extra cautious when it comes to handling and resolving taxes too. Now, consider the fact that there are more than 30 million active small businesses in the U.S and the majority of the businesses have faced minor to large tax issues at some point.
With each tax season, small business owners get ready to file their year-end tax returns with some hesitation. Filing taxes, after all, can be a stressful task and no one understands the possible risks and tax complications better than small business owners.
As a business owner, you have to understand the gravity of the situation. That means assessing the biggest tax issues that may jeopardize the foundation of your small business. In this article, you will learn some of the most common tax issues small businesses face and the solutions you can implement to run smooth business operations.
Long-term Management of Operational Activities
Although long-term managerial operations may not be a big issue for giant corporations, a small business has to tread carefully to avoid paying surplus taxes. Processing business activities and managing time becomes harder when the tax complications are added at the beginning of the year.
Online tax services, for example, have helped small businesses to cut manual hours and provide checklists that can be used to make sure nothing is missed from year-around tax activities.
That said, the management and elimination of human errors could not be resolved completely. It does, however, give small business owners more freedom and confidence to file taxes.
Choosing a Business Structure
The small business owners often instinctively choose their business structure instead of weighing all the variables that may affect the small business. Selecting the wrong business entity can hurt the planned activities and even slow down theoperational activities for an indefinite period.
Small business owners should assess parameters and establish criteria as each state has different tax regulations. Whether you want to form a sole-proprietorship, partnership, or a limited liability company; your business structure will ultimately affect your annual taxes.
Tracking and Keeping the Records Straight
Small business owners often track and keep the records on their own. Without hired help, keeping the record of every purchase receipt becomes a tantalizing routine. The receipt scanning apps such as Expensify, Shoeboxed, NeatDesk, or Wave can help you digitize and store an enormous amount of information instantaneously.
Filing Forms and Schedules
You are basically shouting out loud to get audited when you file forms incorrectly. It is crucial that you file Form 5213 to showcase that the nature of your business activity is not a hobby.This process is of utmost significance if you want to stop the IRS auditing you continuously for five years.
Later on, the IRS will review your returns and thoroughly check whether your three-year profit motive is realized or not. That’s why small businesses should take special notice before filing any form.
Beware of Under Reporting
The IRS authorities may view your underreporting as tax evasion. However, a number of small businesses unintentionally underreport their total income or expenses. As small businesses largely deal with the extensive range of clientele, the possibility to report a small portion of the income sometimes is disregarded.
Though a small underreported amount wouldn’t affect your business activities, a large amount, on the other hand, can wreak havoc. Moreover, failure to report accurate income lands small businesses in more trouble than they could handle.
You can claim more deductions or let the IRS authorities know about the underreported income. Tax authorities take underreporting seriously because it ultimately creates a national tax gap. Small businesses need to cross the line red line between what is considered negligence and tax evasion.
So long as you are unaware of your actual income, the IRS would just impose a penalty, but wouldn’t view it as a tax evasion act. However, you can face criminal prosecution if the IRS established the grounds that you knowingly evaded your taxes.
The ambiguity as to what counts as a business expense often leaves small business owners bewildered. This process becomes even trickier when your personal and professional lives are intertwined. The wise choice would be to seek the counsel of a professional tax expert who can put together your precise business requirements.
❖ Capital Expenses
As a small business owner, you can deduct capital expenses. The nature of such costs is viewed as assets because they are investments. You can capitalize cost on your business assets, improvements, and startup costs.
❖ Apply Limitations
It is vital to remember that you can deduct more than 50% of the meal and entertainment costs. That said, you can’t write off more than $5000 startup costs without amortization to divide the number of payments.
❖ What about the Home Office Deductions?
Small business owners frequently have to use their home for business purposes. You can continue to deduct business expenses like insurance, utility bills, maintenance costs, and mortgage interest.
❖ Other Unused Deductions and Carryovers
Tax deductions such as car expense, retirement plan, rent expense, and employees’ salary can be carried over to the next tax year. You should focus on differentiating between personal and business expenses. To put it bluntly, any personal expense used for business can be classified as deductible.
The Lack and Need of Professional Help
Sure, Section 179 allows small businesses plenty of wiggle room when it comes to expense deductions. However, the criteria to apply these changes can vary. What’s more is that some of these deductions get modified and even expire every year.
A tax consultant, on the other hand, can help you note down the parameters as to how far ahead can you plan. The underlying purpose of planning is to get more organized so that you can manage your records. Also, apply the same rules when it comes to organizing to avoid the distress rush during tax season.
Moreover, you can also present your tax data to a professional tax consultant and align his or her judgment whether your tax software is compatible enough to render correct results.
You may have considerable tax knowledge, but working with a tax professional gives you a fresh perspective of the available data. It is very likely that you may have missed out something that a tax expert can identify.
You cannot rewrite the tax system, but you can certainly evaluate the current tax issues. Collaborate and start working with your team members to get the assistance of a tax professional who can objectively give you advice on how to deal with present tax problems and develop a suitable tax strategy.