These Are the Most Common Tax Filing Mistakes for Entrepreneurs -- and How You Can Avoid Them

As the tax deadline draws closer, reduce the stress on your business by following these tips.

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By Bill Smith

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Tax season can be a stressful time for small-business owners. Many find themselves paying for mistakes that could have easily been avoided with proper planning. Here are some common mistakes made during the startup and operation of a small business, as well as ways that you can avoid these mistakes.

1. Not working with a qualified expert

The first step in creating a small-business tax plan is finding an expert to assist you in forming a plan. It is commonly said that "failing to plan is planning to fail." This is especially true in the small-business world where proper planning can make all the difference. Nearly all of the following mistakes can be avoided with the advice of an expert. The American Institute of Certified Public Accountants (AICPA) and the CPA society of every state maintain a directory of active CPAs that you can search to find a CPA in your area. You should also interview candidates, because they will be working for you and dealing with your most important and sensitive financial decisions. Finding a qualified tax expert should be just as high a priority as finding other qualified employees.

Related: 75 Items You May Be Able to Deduct from Your Taxes

2. Choosing the wrong entity structure

Once you have chosen an expert, the next step is working with that expert to choose the best entity structure for your business. Pass-through entities, such as S corporations, partnerships and LLCs, are popular options, but there are important differences among them that should be carefully considered to find the best fit. Some businesses may want to consider forming a C corporation, but these typically result in higher overall taxes so they are generally used only when the business expects to receive substantial outside investment.

3. Failing to keep accurate records

Once your business is up and running, the most important thing you can do to prepare for tax season is keep accurate books and records. By failing to keep accurate records you can lose out on important tax deductions, which will cost you money. In the event of an audit by the IRS, you may lose legitimate deductions because you cannot substantiate your expenses. You should keep receipts for expenses, payroll, sales and any other items related to your business. These records will also help your tax expert make sure your business is getting every tax break it has earned.

Related: 7 Tips for Keeping Receipts Organized for Tax Time

4. Mixing business and personal expenses

This is a common mistake that can be easily avoided. The benefits of setting up a business entity to shield you from personal liability can be lost if you mix personal and business expenses. Also, a personal expense is not deductible even if you keep the receipt and pay for it with your business account. Instead, maintain a separate checking account and credit cards, if necessary for your business. This will help you at tax time and will allow you to more easily monitor the cash flows of your business. Rarely does a business grow and thrive when the owner treats it as his or her personal piggybank. Instead, a business should be seen as an investment designed to grow over time with proper maintenance and hard work.

Related: Want to Lower Your Taxes? Make the Most of Retirement Planning Tools Like 401(k)s and IRAs.

Avoiding these mistakes can help your chosen tax expert identify all of the deductions and credits you are entitled to, but that is not the end of the story. You should also consult with your expert on a regular basis to ensure you are giving proper consideration to all of the tax implications of your decisions. If you are planning a major acquisition or purchase, you should discuss your options with your tax professional before acting, in order to minimize the cost or maximize your deductions or credits at tax time. You should also make it a priority to discuss the tax implications of hiring employees before you do so. Employment tax issues can be complicated, and there are significant penalties for failing to follow the rules.

Even if you have made some, or all, of these mistakes, it may not be too late to hit the reset button.

Bill Smith

Managing Director for CBIZ MHM’s National Tax Office

Bill Smith is the Managing Director for CBIZ MHM’s National Tax Office. He has more than 30 years of experience representing businesses of all sizes and high wealth individuals in developing and implementing tax strategies or negotiating with the IRS. He consults nationally on a broad range of tax services, including foreign and domestic transactional tax planning for corporations, partnerships, LLCs and individuals. CBIZ MHM is headquartered in Cleveland, Ohio, and Bill Smith is based in Bethesda, Md.

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