4 tax mistakes small business owners can’t afford to make

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These will definitely increase your audit risk.

Main points

• You should keep your business and personal finances as separate as possible.
• You should keep receipts for all tax deductions you plan to claim.
• You may face penalties if you do not make the required estimated tax payments.

Tax season is almost upon us, and it can be tough for small business owners. This is especially true for those who started their businesses this year and have never filed their corporate taxes before.

Your tax liability depends in part on your business income and which tax breaks you qualify for. But if you want to pay as little as possible, you definitely want to avoid the following four costly mistakes.

1. Mixing business and personal expenses

Mixing business and personal expenses can be a big red flag for the IRS. He might think you’re trying to trick the government by claiming business deductions for items you bought for personal use. Even if that’s not what you’re doing, the IRS can have a hard time determining which deductions are legitimate and which aren’t when everything comes out of the same account. And they can audit you.

You want to keep your business finances separate from your personal finances as much as possible. This means separate savings and checking accounts and separate credit accounts.

Doing so can reduce the impact of your business financing on your personal credit score. If your business makes late credit card payments, this won’t hurt you personally as much as it would if you charged everything to your personal credit card. And keeping your business finances separate can help protect your personal finances if you’re sued.

2. Poor record keeping

You are not required to submit receipts or other proof of tax deductions with your tax return, but you do need to have documentation on hand. If the government audits you and you can’t provide proof that your deductions are legitimate, the IRS won’t allow it and your tax bill will increase significantly.

Experience maintaining receipts and copies of bank and credit card statements. Try to keep them easily accessible and organized, even if that means putting them in a folder where you can come back to them at tax time.

3. Filling out the wrong tax forms

Different types of businesses must submit different tax forms to keep the government happy. An AC corporation, for example, requires a different form than an S corporation. And if you have employees, you’ll need to fill out additional forms detailing what you paid them during the year. It’s important to make sure you know exactly what forms you need to fill out before submitting.

A tax advisor can help you figure this out, but many tax preparation software offer small business versions that help you figure out what forms you need to fill out with a few simple questions. Remember, these software packages are usually more expensive than packages for individuals who file their own taxes.

4. Skipping or underestimating estimated tax payments

Traditional workers have taxes withheld from each paycheck, but not so for business owners. That’s why the government generally requires you to make quarterly estimated tax payments. How much you owe depends on your income.

You normally have to pay these on April, June, September and January 15 of the following year. If any of these days fall on a weekend or holiday, the date will be moved to the next business day. You are free to make payments more often — for example, monthly — if you choose. The above deadlines indicate your last chance to make your estimated tax payment for that quarter.

If you were a US citizen who had no tax liability last year, you may not have to pay an estimated tax this year. But for most business owners, it’s best to set reminders for yourself so you don’t forget to make payments. If you fail to do so, or if your payment is significantly less than your actual tax liability for the year, the government may charge you a penalty that increases your tax liability.

Filing personal taxes is confusing enough and business taxes can be even more complicated. But unless you want to spend more time going over your returns with the help of an auditor, it’s important to take the time to make sure you file them correctly. If you have any questions, don’t hesitate. Talk to a tax professional who can guide you in the right direction.