I did what?: Three common tax mistakes small businesses make

As a CPA, I’ve seen a wide variety of mistakes related to taxes, some of which were very costly to business owners. The IRS and state tax code and regulations are very complex. And they change every year, of course. This creates big challenges for you as a business owner if you don’t have a tax expert advising you.

In this article, I talk about some errors common to small businesses that can cause large problems for you, the business owner.

Mistake #1: Not keeping good records

Good record keeping is key to identifying and justifying tax deductions. You must be able to provide details about many important deductions, or the IRS or state taxing authority can disallow them. For example, you must be able to provide information about deducted meals, including who you dined with and where the meal took place, along with the cost and the purpose of the meal.

Here’s another example: You need to keep receipts for larger cash purchases so that you can identify and prove the deductions, as well as track the sales tax you paid so it can be accounted for in use tax calculations. Increasingly, people and businesses are buying goods outside their home state, either over the Internet or through some other means. These sales often happen without any sales tax being charged or paid. That’s where use taxes come in.

Because sales tax is a huge revenue source for most states, many of them are implementing use taxes to tap into the missing sales tax on goods bought out of state. And those states with use taxes are stepping up their reporting requirements. The California Board of Equalization is one such taxing authority that’s started sending letters to business owners to get them to comply with California’s use tax requirements.

So keep those receipts and records so there’s never any question about your deductions and purchases.

Mistake #2: Not keeping records separated by year

Income taxing authorities work on a strict calendar year basis—January 1 through December 31. Small business corporations can set up a fiscal year different from the calendar year. But the businesses that do this must apply to the taxing authorities, and then properly allocate records to the correct year.

Most tax returns are filed on a “cash” basis, which means that income is recognized for tax purposes when the money arrives, not when it’s owed. Likewise, deductions are based on when the bills are paid, not when they’re due.

Talk with your CPA about making sure you’re keeping your records properly by year and basis. In this case, that old saying—”an ounce of prevention is worth a pound of cure”—rings true.

Mistake #3: Not planning ahead for taxes

Many small business owners don’t think very much about taxes until the year is over and they need to file their  tax returns. This can be a very costly mistake! Once the year is over, it’s usually too late to generate additional transactions that affect income and deductions for that year. For example, just before year end, your business can make additional deductible purchases or can advertise special offers to bring in more income.

Additionally, due to the slow recovery from recession, Congress passed many new tax benefits for small businesses to help spark job growth. But many of the benefits require you act during the tax year in order to receive them.

Now, more than ever, it’s wise to meet with your CPA to discuss tax reduction opportunities before the year ends. A small amount of effort and expense in 2010 may result in significant tax savings for your small business when tax season comes along!

About Irene Meyer-Lopez

Irene Meyer-Lopez is the President of Meyer-Lopez & Associates, Inc. and has been a CPA for 22 years. She also has extensive business experience and is a Certified QuickBooks Pro Advisor. She and her firm provide a full set of services for small to medium-sized businesses, including accounting, financial statement preparation and review, bookkeeping, tax preparation and planning, payroll, incorporation, corporate minutes and filings, human resources support and business advisory services. You can learn more about Irene and contact her through her firm’s web site: www.Meyer-LopezCPA.com

You can also post your own question to the QuickBooks for Mac community.