Whether you do your own taxes or pay someone else to do them, it’s never fun. If you’re not a tax professional—that is, a CPA—and decide to take this task on yourself, you’re bound to miss something. Either you claim what you shouldn’t or forget to deduct what you should. Small wonder, then, that a poll conducted by the National Federation of Independent Business two years ago found that 88 percent of small-business owners use a paid preparer to file their tax returns.
But even if you put your tax situation in the hands of a professional, he or she still depends on the information you provide to create an accurate tax filing.
Small-business owners, especially in construction, where days can be divided between jobsite visits, sales appointments, and sundry other responsibilities, it can be difficult to block out time to make sure that annual tax filing has what it needs to be complete and accurate. But failure to do so can result in an IRS audit, which will tie up a lot more time than the time it takes to properly prepare your filing, and can result—ask anyone who’s been through an audit—in lots of stress.
Many financial planners and tax advisers weigh in at this time of year, offering tips on what to do, or avoid doing, to put together your company’s taxes. These suggestions all aim for one thing: to ensure that your filing is accurate.
Evidence of Money Spent
Start with record-keeping. Failure to keep good records may cause you to overlook some potent deductions because you simply can’t recall them. Even worse, according to American Express, is that, in the event of an audit, you may lose the deductions you’ve taken because you don’t have the records needed to prove entitlement to the deductions. The financial services company suggests that business owners “save receipts, invoices and other papers that show income and expenses. Use a good accounting tool—software or in the cloud—to record your income and expenses.” David Ingram at the Houston Chronicle suggests you file “sales receipts, invoices, canceled checks, deposit slips and any other documents, that prove your company’s income and expenses, and that substantiate any possible deductions.” He also advises that you store them for at least five years, as “these documents will prove invaluable if the IRS asks you to explain any items on your tax return.”
And best not to stash those in some shoebox and drag them out the week before filing, trying to total them all up in a frenzy. Instead, save electronic copies and set up an ongoing and updated record of expense items, noting and dating expense items in appropriate columns as they occur. That way, when it comes time to take a look at the information you have and add up the deductions that bring down your tax bill, you 1) save yourself time, 2) know exactly what kind of deduction you can expect, and 3) avoid the possible mistakes that stressed out, last-minute computations can cause.
Never Mix, Never Worry
You probably already know and list many legitimate deductions. Likely, however, there are a few that may have escaped your attention. Small Business Trends provides a list of the Top 20 Tax Deductions For Small Business. On it are items you may have overlooked or have never even considered. For instance, maintenance and repairs to your building “are fully deductible,” the site points out. So are commissions and ordinary advertising costs, and legal and professional fees (such as your accountant’s).
But avoid yielding to the temptation to list your family vacation and the pet sitter you hired to walk the dog during those two weeks as a business expense. The website CPA Practice Advisor suggests on its list of Five Biggest Mistakes you could make, that the biggest is “mixing business and personal accounts and expenses.” On its blog, QuickBooks, the business financial and accounting software company, notes that it's common for owners to run such items as “home rent, pet expenses, groceries, clothing, and personal items” through the business. These would be a red flag for the IRS.
And it may not even be that obvious or straightforward. It’s just messy, confusing, and frustrating. For instance, say you’re still paying subcontractors and the supply yard out of your personal checking account. Or charging personal expenses—car repairs—to your company credit card because it just happened to be the one in your wallet when it came time to pay. You will pay, alright, in the event your records are subject to IRS scrutiny. The easiest way to avoid doing anything like that is to set up separate bank accounts and credit cards/lines of credit, notes Isaac M. O’Bannon at CPA Practice Advisor. “While having separate bank and credit accounts is not strictly required,” O’Bannon notes, “it is advised by most tax professionals, because it not only makes tax time much easier, it also ensures much more accurate bookkeeping overall, as well as financial reporting.”
Keeping a separate bank account and credit line for your business will simplify tax preparation and reduce chances of error. It will also give you a quick way to get a sense of what you’re spending, since overstated business expenses are another IRS red flag and the agency’s computers are programmed to quickly spot that flag. “A fast way to get the attention of the IRS is to have expenses that either exceed the business’ income over several years, or to have certain types of expenses that are outside of common percentage thresholds,” notes CPA Practice Advisor. “Whether it’s for business travel, meals and entertainment, printing supplies, or other usually legitimate deductions, the IRS’ computers are good at looking at what similar small businesses in an industry type spend on similar expenses.”
Called a Deadline for a Reason
You may be strapped for time or have other priorities, but don’t miss the filing date. It’s called a deadline for a reason. “When you fail to file your taxes on time, the IRS will impose a penalty of 0.5 to one percent per month,” the website TopTaxDefenders.com points out on its blog. “The IRS' computers impose this fine automatically for each month that your return is late. If you fail to pay your taxes on time, you risk an even higher penalty of five percent each month that you owe the IRS. The IRS can charge the five percent penalty for up to five months and a total of 25 percent of your total owed tax bill.”
Finally, Barbara Weltman, attorney and author of several books on taxes and small business or self-employment, offers this suggestion: Use a tax professional who is not only competent but also ethical. “Don’t use anyone who suggests that you hide income or take write-offs you know you aren’t entitled to—this is a tip-off that the preparer is shady” she points out on the American Express website. If he’s doing it with you, he’s doing it with all his clients, and that could well trigger an audit for everyone connected to that tax preparer. “If the IRS catches the preparer, all the preparer’s clients may come under audit,” Weltman writes. “And, by not using a good preparer, you may miss out on write-offs you're rightfully entitled to. Give taxes the time and attention they deserve so you can pay as little as you’re legally required to pay. And you’ll sleep well at night!”