7 Ways to Advoid Tax Pitfalls
The IRS isn’t known for its easy-come, easy-go attitude. So it’s important to mind your financial Ps and Qs. That’s especially important for smaller brokerages that use independent contractors for transaction and administrative support work. “At the end of the year, you have to provide a proper accounting to (the IRS),” says Butch Beeman, a member of the Missouri Society of Certified Public Accountants. When there’s a question, the IRS always assumes the worst until the business owner can prove otherwise.
Below are Beeman’s top seven tips for avoiding common financial mistakes made by small businesses.
1. Set up a separate bank account for your business. “It’s unadvisable to comingle your personal and business income,” Beeman says. “Mistakes can be made on the income side, and it’s probably worse on the expense side.” An OfficeMax charge, for example, could be copier paper and toner for the office printer or school supplies for your kids. Putting it all on one receipt just causes headaches at tax time.
2. Track your expenses. Use specialized business software to track all business activity. It’s easier to see your cash flow month-to-month and can help identify patterns in spending or income.
3. Use the company card. Always use a company credit card or company check to pay expenses. Why create work by having to keep track of cash receipts? Plus, “it’s easy to overlook getting those cash expenditures included on your tax return at the end of the year,” Beeman says.
4. Don’t forget the receipt. Never pay expenses without saving a receipt or documenting what the money was for and how the purchase contributes to your business. If you are audited, you’ll need that documentation to prove the expense.
5. Go Inc. Limit liability by incorporating your company and talking with your insurance broker about whether you need a commercial umbrella policy, which covers accidents that exceed your regular business insurance.
6. Think before you buy. Don’t run out to buy new office equipment just because what you have is fully depreciated. “You might save on your taxes, but maybe you’re better off keeping the money in your pocket and paying a little extra tax,” Beeman says. “It’s really a case-by-case thing.”
7. Hire a certified public accountant for your business taxes. “We are required to have continuing education, and we’re licensed and monitored,” Beeman says. “What we bring to the table is additional training, education, and experience to help guide you.” CPAs can help business owners consider ancillary items, including insurance needs, retirement investments, and estate planning. Best of all, their tax preparation services are tax-deductible.
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