Some of the biggest problems small business owners have during income tax filing season are the result of mistakes and oversights they made during the previous year.
Sloppy record-keeping, even when accounting software is used, is a big reason why owners struggle at tax time. Another problem is that owners often short-change themselves by not being sure they're taking all the deductions they're entitled to. That can also be the result of haphazard records, but it also may come from not knowing some tax law basics.
Use Software to Help, Not Hurt Yourself
Many owners use software that's designed to help small businesses keep their books easily. They run into problems when they don't input their income and expense figures properly.
Jeffrey Berdahl, a certified public accountant with RLB Accountants in Allentown, Pa., said some clients haven't taken the time to really learn how to use a record-keeping program. "They hand us a disk or thumb drive, and they've handed us a mess."
It's the high-tech equivalent of what accountants ruefully call shoebox or shopping bag clients, ones who show up with a chaotic pile of receipts that a CPA has to then sort through. When an accountant gets a disorganized disk or drive, it has to be straightened out before a return can be completed.
Berdahl says some owners then repeat the problem the next year. The solution is to become more of an expert at using the software, or pay someone who's more techno-savvy to input your numbers.
Pay Attention to What You’re Paying
A common problem for business owners who use vehicles or homes for both business and personal reasons is they forget to keep track of what they spend for each. For example, Berdahl said, an owner who gasses up his car may forget to reimburse himself for the portion of the purchase that should go toward personal use. The reverse can happen: An owner doesn't think to take a tax deduction for the portion that should go toward the business.
Owners who use their cars partly for the business, or who have a home office, should go over all the expenses from the previous year and be sure that they don't miss any chances for deductions. With a vehicle, insurance, gas, repairs and garage rental can all be deductible. An owner needs to determine the percentage that the vehicle was used for business and then multiply that by the expenses. For example, if the car was used 60 percent for business, then 60 percent of deductible expenses can be listed on a tax return. It's also possible to use the IRS' mileage allowance to figure a deduction.
With a house or apartment, there are similar rules for computing a deduction. In this case, square footage is used. Repairs, mortgage interest or rent, insurance, utilities and maintenance costs can all be deducted.
For more information, an owner should look at IRS Publication 587, Business Use of Your Home, or Publication 463, Travel, Entertainment, Gift and Car Expenses. You can find them on the IRS website, http://www.irs.gov.
Pay Now or Pay More Later
Berdahl says many owners, concerned about spending money during the recession, have shied away from consulting an accountant during the course of the year. Then, at tax time, their unanswered questions turn into problems. For example, if an owner didn't ask a CPA for help in making decisions on big equipment purchases, the business could lose out on deductions designed to help small companies. The cost of a few hours with an accountant may be small in comparison to the amount the business ends up paying the government in taxes.
The solution is to get to an accountant early. Before the end of the year, and then early in tax filing season.