It is important that businesses are set up properly and are operated in a legitimate manner. This means making sure the business entity is correctly registered with the applicable government agencies as well as making sure a business name is secured. However, one commonly overlooked aspect of setting up a legitimate business is dealing with tax laws. Failure to follow applicable tax laws can result in serious consequences for a company, including a future need for IRS Penalty Forgiveness.
Failing to track deductible expenses
Many entrepreneurs, due to the hecticness of running a small business, will fail to keep track of their deductible expenses. This is commonly caused by the small business owner using his or her personal money to pay for business expenses. For instance, an entrepreneur may use a personal credit card to pay for a business lunch with a client. Additionally, he or she may use his or her own cash for business expenses during a business trip.
Failure to keep personal funds and business funds separate can result in losing track of which expenses are business-related and which ones are not. This can result in losing out on valuable tax deductions. To make sure this does not happen a business owner should try to use only his or her business account, rather than a personal bank account, for expenses related to the business. However, if personal funds are used, he or she should allow the business to reimburse him or her. Also, it is necessary to keep all receipts for business expenses.
Sometimes expenses can be ambiguous in nature. This can result in it being unclear whether a particular expense can be counted as business-related. This can be particularly true when one’s professional and personal lives intertwine in a significant way. For instance, it may not be clear if one should deduct costs of keeping a home office if it is only used one day per week.
Complicated tax advantages
In many instances small businesses can utilize certain tax advantages, such as some capital gains taxes. The Section 179 deduction is another common tax advantage available for small businesses in certain situations. However, the special requirements for these tax advantages makes it complicated and difficult for businesses to reap these benefits. Additionally, some tax advantages expire or their requirements may change periodically.
Under-reporting business income
Another common tax problem for small businesses is underreporting of income. Since many small businesses deal with large numbers of customers and clients, the business owner may forget to include a certain portion of income earned. Although underreporting small amounts of income usually does not become an issue, if the amount is large enough it can result in a business having to deal with an audit and possibly penalties.
Failure to report sales and payroll taxes
Not only is it important to make sure to report accurate income taxes, it is essential for businesses to report sales taxes and payroll taxes. These taxes are known as “trust fund” taxes due to these taxes being collected from others. Sales taxes are collected from customers while payroll taxes are collected from employees. The business then holds these amounts in trust which will then later be reported to the applicable tax authority. Purposely using these collected taxes to fund business operations or other purposes instead of reporting the taxes collected can constitute tax fraud. This can result in severe monetary penalties or even time behind bars.
Tax fraud and lifestyle
One common way entrepreneurs attract the attention of tax authorities is by having a lavish lifestyle that is not in alignment with reported business income. Many times this will make tax authorities suspicious that a business has not been accurately reporting its income. This is more serious than just simply forgetting to keep track of specific income, since it could be deemed willful tax evasion which can result in criminal charges.
Consulting a tax professional
As one can see it is difficult to keep track of and understand all the various aspects of relevant tax laws for a business. Although it is technically possible for an average untrained business owner to work out some of the tax issues, in certain instances it is not possible to do without consulting a tax professional. Another option would be to use tax software. However, these software programs generally lack the ability to personalize a business’s tax strategy in order to fully maximize the various deductions and tax advantages available.