Short tempers, hair pulling, chewed-up pencils…
These are just a few unmistakable signs that tax time has arrived. Personal taxes are daunting enough, but small business owners usually grapple with complex tax codes. And often, those taxes are made all the more confounding for small business owners by factors like where they do business, how they handle inventory and what their employee mix looks like, to name just a few.
Failure to account for those factors (no pun intended) can land a small business in hot water with the IRS.
Jamie Sutherland, the president of U.S. operations for Xero, a cloud-based small business accounting specialist, shared some insights from a recent survey of 400 U.S.-based accountants conducted by Zogby Analytics for his company. The results, as seen in this infographic, indicate that a lot of entrepreneurs basically throw caution to the wind and hope everything works out fine in the end.
Rarely is that a good tax strategy. Here are the top tax mistakes made by small business owners along with tips on how to avoid them.
The 5 Worst Tax Mistakes and Tips to Help Avoid Them
1. Ignoring Your Accountant
Today’s cloud-based accounting services and software can make a small business owner pretty self-sufficient, reducing or sometimes eliminating the need for an accounting professional until tax day nears.
It’s a selling point that Xero doesn’t believe in. In fact, it’s not uncommon for Xero’s customers to grant their accountants guest access to their “books.” Hidden behind Xero’s user-friendly dashboards and tools, lies a general ledger that accountants can dig into.
According to the survey, 32 percent of respondents said they do not meet with an accounting professional regularly and 25 percent talk to them only when tax time rolls around. That’s the single biggest mistake small businesses make, according to Sutherland. They “talk to their accountant only during tax time.”
For a stress-free April 15, keep your accountant in the loop during the rest of the year.
2. Arriving Late to Tax Season
Technically speaking, tax season starts the moment your business does. And it never stops.
Sutherland says that the earlier a business owner starts preparing for tax season, the better. In fact, mirroring his advice about consulting your accountant, small business owners should be in “tax mode” all year long, he says.
A small minority of the surveyed accountants, only 10 percent, suggest preparing during tax filing season — January to April, generally. Most accountants (63 percent) say that tax preparation is a yearlong effort.
Seems like a ploy by accountants to drum up business during the slow season, doesn’t it?
Cynicism in this case can negatively affect your shop’s bottom line. That’s because the tax landscape can shift dramatically depending on which regulations are enacted or allowed to lapse. And good luck keeping track of when these changes occur.
3. Ignoring Tax Laws
Nobody expects small business owners to also become tax experts. Nonetheless, it’s their responsibility to avoid unexpected tax expenses and to capitalize on beneficial changes.
Let the accountants worry about it — they are the experts, after all. But it’s critical that they’re present early enough in the process to help you plan.
For example, Xero offers the following must-know tax changes for 2012:
Payroll: The American Taxpayer Relief Act did not extend the payroll tax, but the two percent “break” was only a couple of years old (2011 & 2012). This change is more of an unfortunate recant, than it is a tax hike.
Healthcare Tax(es): Under the Patient Protection and Affordable Care Act (PPACA), beginning in 2013, higher income taxpayers must start paying a 3.8 percent additional tax on Net Investment Income (NII). Additionally, high earners will incur an Additional Medicare Tax of 0.9 percent on wage and/or self-employment.
And these are just two of the tax changes that impact small businesses this tax season.
4. Deducting Carelessly (or Not at All)
Want to scare a small business owner right out of his or her skin? Instead of “Boo!” yell “Audit!”
Forty-three percent of those accountants polled said that an excessive amount of deductions relative to income could trigger an audit. Twenty-seven percent said that misidentifying your workforce — mislabeling employees and contract workers, for example — was a big red flag.
And forget about trying to deduct things like family vacations, pets, traffic tickets and weddings. Yes, some have tried, informs Sutherland.
Conversely, don’t let the deductions that you’re rightfully entitled to slip past your fingers. Among small business owners, the most commonly overlooked deductions include out-of-pocket expenses (34 percent), depreciation (20 percent) and car expenses (14 percent).
5. Don’t Keep Your Finances Up-to-date
Procrastination is the enemy.
If you have an iPhone or Android smartphone, there is no excuse for a drawer full of receipts. Mobile apps let you capture and log receipts seconds after you complete a transaction.
Not only do you avoid the that stressful last-minute rush to get your accounting in order, your accountant — provided that you’re regularly consulting with her — can better guide you through the consequences of your business decisions if all of the financial data is on the table.
Put simply, “have your finances up-to-date and you get better advice from their accountant,” advises Sutherland. Don’t let the accounting work pile up.
Bonus Tip: The Volume Discount
Want cheaper accounting services and better service? Combine tips one and five.
If you regularly consult with your accountant and keep your finances up-to-date, your accountant may treat you to lower fees (33 percent). Some accountants, 14 percent at least, said that they would treat you to happy hour.
Hey, not all rewards are monetary.
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