Tax Mistakes New Business Owners Make in Their First Year

Starting a new business is an exciting journey. Many new business owners get caught up in the whirlwind of marketing, hiring, operations, and cash flow. Tax planning is often moved to the back burner. But planning for taxes throughout the year is essential and can help your new business avoid costly mistakes, minimize tax liability, and remain compliant with IRS regulations. Here, we identify ten common tax mistakes for new business owners and how to avoid them.

Choosing the Wrong Business Structure

Many new business owners default to a sole proprietorship because it is the easiest business structure to set up. But, as your business grows, the right entity structure could reduce your overall tax burden and provide additional legal protection and tax advantages.

Not Separating Business and Personal Finances

New business owners often make the mistake of mixing business and personal finances. However, doing so can lead to legal risk, unplanned tax liabilities, and other operational challenges. It can also make it more difficult to understand how your business is performing. Creating separate business accounts when you register a business and keeping business and personal finances separate allows you to better evaluate business performance and streamlines tax planning and preparation.

Skipping Quarterly Estimated Taxes

While employees have taxes withheld from their paychecks, self-employed business owners do not. If you are making money, the IRS requires that you make quarterly estimated tax payments. If you fail to make them, you could face financial penalties when you file your tax returns.

Misclassifying Employees as Contractors

The IRS and the Department of Labor have strict rules on how and when to classify workers as independent contractors. Misclassifying a worker as a contractor when they should be an employee can create serious tax issues, such as unpaid taxes and back wages, and could expose the business to legal liability and other penalties.

To classify a worker as a contractor, the IRS considers multiple factors, including behavioral control, financial control, and the nature of the relationship. If you tell someone when to work, provide their tools, and they work only for you, they are almost certainly an employee.

Not Tracking Mileage

Many new business owners do not realize they can deduct mileage, or they forget to do it. The cost to travel to and from client meetings, job sites, or supplier locations is deductible. To deduct mileage, the IRS requires contemporaneous recordkeeping, which means you must log trips at or near the time they occurred, rather than reconstructing them from memory. With the federal mileage rate currently set at over 72 cents per mile, the savings to your business can be substantial.

Missing Deductible Expenses

Some new business owners forget about deductible expenses until it is too late. Software subscriptions, professional association dues, insurance, bank fees, professional development, and professional fees are all deductible. Tracking and categorizing these expenses as they occur helps ensure nothing is missed.

Not Planning for Taxes

Tax planning should be a year-round activity. Retirement contributions, equipment purchases, timing of income and expenses, and entity selection all have deadlines that require action during the tax year. Working with a tax professional throughout the year allows you to use the tax code to your advantage to structure transactions in a way that minimizes tax liability.

Poor Record Keeping

The IRS can audit tax returns up to three years after filing. If you are unable to produce the documentation to support a deduction, you lose it. The IRS recommends keeping most business records for at least three years, and some records even longer. Record retention need not be complicated and can be accomplished through a cloud-based folder to store photos of receipts, monthly statements, and other financial documents.

Trying to DIY Business Tax Returns

Free tax software may be sufficient for a simple individual return, but once you add a business to the mix, the complexity of tax calculations increases significantly, and the cost of a mistake can be much higher. The tax code is constantly changing, and it can be difficult to identify and understand the nuances of tax law. A tax professional is trained to stay up-to-date on changing tax laws and how they may affect your business, and can help you take advantage of deductions to minimize your tax liability.

Not Using Proper Accounting Software

New business owners may be tempted to save by not purchasing accounting software. This decision can leave you penny-wise but pound-foolish. Proper accounting software helps ensure accurate record-keeping, efficient workflows, and makes life easier when it comes time to calculate taxes.

Choose an accounting system that can grow with the needs of your business. The right system will catch issues before they become problems, identify invoicing errors, and offer insight to help you make better financial decisions for the company.

Contact Gudorf Tax Group Today

Navigating business taxes and deductions can be complicated for new business owners, but you do not have to do it alone. Gudorf Tax Group offers comprehensive tax strategies to help businesses navigate the complex tax landscape. Contact Gudorf Tax Group today to schedule an appointment with our Ohio accounting and tax preparation professionals.