Tax Problems Business Owners Should Watch Out For
Taxes are one of the major problems that many businesses run into. What can be deducted from your expenses? What happens if the Internal Revenue Service audits you? Those are just a few of the many business tax problems that people often run into. Fortunately, there are things that you can do in order to avoid problems.
Not Deducting Business-Related Expenses Properly
Start-up costs can create major problems for businesses when it is time for businesses to do their taxes. Many small business owners think that they can deduct all of their expenses from their taxes. However, you cannot do that until you make a sale. Any expense that you incur prior to making your first sale is considered a start-up cost. This includes things such as renting an office space, buying equipment or buying a computer. You can deduct these costs over the next 15 years.
You can deduct $5,000 in start-up costs during your first year of business. You can also deduct $5,000 in organizational costs. Legal fees and the cost of setting up a corporation are examples of organizational costs.
However, these deductions only apply if your start-up costs are under $50,000. Even if your start-up costs are $55,000, you will not be able to qualify for these deductions.
Not Deducting Travel Expenses Properly
Travel expenses are another one of the common business tax problems. Even if you travel for entertainment, you may still be able to deduct these expenses. However, you must be able to prove that it is a business-related expense. You can deduct all business-related travel expenses. You can also deduct up to 50 percent for entertainment and meals.
In order to properly deduct expenses from your taxes, you will need to keep receipts of everything. Keeping an accurate record of your expenses will increase the chances of being accepted and validated by the Internal Revenue Service.
Mixing Business and Personal Expenses
It may seem like it is easier for you to put all of your business and personal expenses together. However, this can create problems for you later on down the road. Personal items, clothing, groceries and rent should not be included with your taxes. This can trigger an IRS audit.
The best way to avoid these problems is to keep your personal expenses separate from your business ones. It is also helpful to create separate accounts for those expenses.
Not Deducting Your Home Office Properly
Home office deductions often trigger an Internal Revenue Service audit. You are only allowed to deduct the space in your home that you use for your business. It is best for you to have someone else measure the home office space in your home. Not only can you deduct your home office space, but you can also deduct a percentage of your utilities. You will also need to send a letter to the IRS that states the footage of your home office space.
Not Deducting Your Home Computer Properly
A computer may be considered a personal expense, which should not be included with your business taxes. If you plan on deducting your home computer, then you should only use it for business-related purposes. You will have to calculate the amount of time that you actually dedicate it to business-related purposes.
Not Deducting Your Rent Properly
If you have a home office, then you can still deduct it if you are a renter. You will need to consult with an accountant in order to ensure that it is done properly.
Not Paying Your Taxes on Time
One of the most important things that you can do as a business owner is make sure that your taxes are paid on time. The Internal Revenue Service will typically add 0.5 to 1 percent to the tax debt for every month that you do not pay. This penalty is automatically added to your taxes when you file a return, but you do not pay. A penalty will also be added if you do not pay the full amount.
You can avoid this by paying the tax debt before the due date. If you are unable to do this, then you will need to contact the Internal Revenue Service and set up a payment plan.