In our last blog post, we began discussing actions that a small business owner may take that can put him or her at an increased risk of being audited by the Internal Revenue Service. We've already mentioned how misclassifying employees and failing to maintain organized and accurate business and financial records can land a business owner in hot water with the IRS. In this post, we'll discuss some other business and tax-related faux pas that may raise a red flag that a small business or business owner isn't tax-compliant.
It may seem fairly obvious that a small business owner needs to ensure that he or she meets applicable tax deadlines. However, mistakes happen and a business owner who fails to take steps to engage in tax-planning year-round may be unprepared and unable to meet the April 15 tax deadline. At five and six percent respectively, penalties imposed on business owners who fail to file or pay their taxes on time are stiff and can cause significant financial hardships.
Business deductions are another area that can create tax problems for small business owners. While business owners are eligible and encouraged to take deductions, suspicions may surface if such deductions seem excessive. According to the IRS, business owners can take advantage of deductions with regard to "ordinary and necessary" expenses incurred while operating a business.
Valid deductions that are frequently taken by business owners include expenses related to office equipment, travel expenses, a home office, gas mileage and insurance. While these types of deductions are considered routine, business owners must be careful and cautious not to take deductions that relate to personal expenses. For example, say a business owner's family accompanied him or her on a trip to meet a prospective client. While specific expenses related to the client meeting may be deducted, expenses related to airline tickets, lodging and meals for one's entire family cannot.
Business owners have a lot on their plates and many simply don't have the time to keep abreast of detailed and complex financial and tax matters. In cases where a business owner is or fears that he or she may be in violation of tax laws and codes, it's wise to contact an attorney.
Source: Nerdwallet.com, "5 Frequent Small Business Tax Mistakes to Avoid," Steve Nicastro, Oct. 15, 2014