Tax day is almost here and millions of small business owners are scrambling to get their documents in order. But if you’re not careful, you could be making some common mistakes that not only increase your chances of an IRS audit, but also harm your business in the long term, a Xero survey of accountants reveals.
First of all, if you’ve just started planning for tax season, you’re making a big mistake. The vast majority (55 percent) of accountants say tax planning should occur all year long; 27 percent say, at a minimum, it should take place before the end of the calendar year.
Overall, the single biggest mistake SMBs can make is only talking to their accountants during tax time. Nearly three-fourths (65 percent) of accountants recommend collaboration throughout the year, with 44 percent suggesting business owners should meet with their accountants once a month.
As for what common errors lead to audits, faulty deductions head the list. Excessive deductions (36 percent) and mixing business and personal deductions (35 percent) are the main cause of audits, say accountants; misclassifying workers was cited by 14 percent of accountants.
The most common thing small business owners try to deduct that they shouldn’t? The family pet was number one, with 54 percent of accountants saying a client has tried to deduct a pet, pet care or veterinary expenses. Number two: 42 percent report clients trying to pass off a family vacation as a business trip.
Meanwhile, small business owners shoot themselves in the foot by overlooking deductions they could be taking. Topping that list are depreciation (30 percent) and out-of-pocket expenses (29 percent). However, 16 percent of accountants cite auto expenses and 10 percent cite office improvements as frequently overlooked.
If you’ve waited this long to get ready for tax time, I hope you at least have your financial data in order. Nearly 40 percent of accountants say their clients don’t have up-to-date records, and 20 percent say their clients don’t use tools, such as cloud-based accounting systems and financial dashboards, that give them real-time insight into their finances. Using cloud-based accounting software can save you money at tax time. More than half (54 percent) of accountants estimate they’d save between five and 20 hours preparing clients’ taxes if their clients’ financial records were up-to-date. That’s a lot of hourly billing you don’t have to be paying for.
More important, however, using accounting software that keeps your financial data current and lets you see what’s going on at a glance enables you to identify trends so you can spot opportunities and take care of problems before they get out of hand.
Your SCORE mentor can help you determine the right accounting system for you and get you up to speed on using it. Don’t have a mentor yet? Visit www.score.org to get matched with one.