With corporate tax season upon us, I was curious about the most common--and costly--mistakes entrepreneurs make that could affect their personal finances. So I polled 25 CPAs around the U.S. to find out. Beyond the obvious--we keep sloppy records, we mix business and personal expenses--here's what they had to say.
Misclassifying workers. This issue comes up when independent contractors you've hired are determined by the state to be employees and therefore subject to minimum wage and overtime pay, unemployment insurance, payroll taxes and workers' compensation.
"Unfortunately, there are no hard and fast rules on when an independent contractor must be considered an employee, and the nuances vary state by state," says Jessie Seaman of the Tax Defense Network, a Jacksonville, Fla., firm that specializes in tax disputes.
"But in general, if you can't operate your business on a day-to-day basis without these people, then they're employees."
Not collecting sales tax for online sales. According to our panel, many small-business owners assume that because they don't pay sales tax on online purchases from, say, Amazon, they don't need to collect sales tax from their own customers. But if they're selling to customers within their state, and the state, county or city has a sales tax, then the entrepreneur is on the hook to collect and submit those taxes, says Christopher McCauley, CEO of Santa Clara, Calif.-based online marketplace Whizkins.
McCauley anticipates the issue of online sales taxes to become even more complex with the expected passage of the Marketplace Fairness Act. This will make nonexempted online merchants responsible for collecting the correct local sale tax for every individual customer located in states that meet the law's tax simplification requirements.
Deducting everything from day one. New business owners often fall into the trap of assuming they can deduct everything the moment they open a business bank account. According to New Jersey CPA Gail Rosen, what they don't realize is that they can't claim those deductions until the year their business opens. Additionally, she points out, there is a limit to how much startups can deduct that first year. The rest must be amortized over 15 years. (Yes, 15 years.) That's a tough lesson for business owners to learn when it comes to filing their first corporate tax returns.
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Not every tax mistake involves an audit risk. David Reid, tax director with WTP Advisors in White Plains, N.Y., points to three tax breaks that are often overlooked or underutilized by small businesses--deductions and claims that could allow 'treps to save thousands of dollars each year in taxes.
Domestic Production Activities Deduction. Put simply, if you manufacture a product in the U.S., you get a deduction equal to 9 percent of related income. However, the guidelines for the deduction can be tricky to navigate, which is why few small companies pursue it.
Research Tax Credit. The full Alternative Simplified Credit (ASC) is equal to 14 percent of a company's R&D expenses, but a research-credit specialist can help companies identify additional expenses that may be credit-eligible, but that will not increase the credit rate, says Jeff Malo, a partner at WTP.
Interest Charge Domestic International Sales Corporation. This setup allows a company that exports products or services to cut the tax rate paid on at least half of its export profits from 39.6 to 23.8 percent.