Tax Made Simple
For business owners, navigating the world of tax compliance can be extremely complicated. On top of the business itself, tax compliance represents a world of confusion for most business owners. The following tips are meant to provide simple, yet highly effective tips on how a business owner can make tax compliance easier. These tips are by no means all-inclusive; they are simply designed to point your business in the right direction.
Work as you go. Every year the IRS selects random returns for audits, and those operating small businesses are at a greater risk of being picked up for these random audits as small business owners are usually not privy to the tax rules of the IRS. In an audit, the IRS will look at your financial records and ask you to provide documentation to support the tax positions you took on your personal or business return. Failing to comply, or providing improper records can lead to owing a much higher tax liability than you should owe.
To prevent this, you should be “working as you go.” When it comes to keeping tax records for support for future and current returns, the best practice is to create the record as you go. This means when you incur a business expense, place that expense in a folder, or properly categorize it in accordance with your business’s record-keeping policy. A great example of “working as you go” is keeping a contemporaneous mileage log if your business involves driving. This means that once you complete a trip, you would record, or log the miles driven so that you do not find yourself trying to remember trips taken throughout the year.
Mind your business. One of the biggest mistakes small business owners make when it comes to running their business is intermingling business and personal expenses. Such a scenario usually happens because a person fails to take the appropriate preparation before starting a business, therefore, as things pick up, they are left with a mess of expenses from business and personal accounts. This tends to make tax time difficult, and can make deductions much more difficult to defend in an audit.
To alleviate this common problem, be sure to keep business income and expenses separate. To do this is actually quite simple: (1) create the appropriate entity that makes sense for the type and size of business you are creating; (2) create a business bank account that is fully separate from your personal account; and (3) as the year goes on, deposit all business income into the business account, and take business expenses from the business account. While this seems obvious, most businesses fail to do this and end up paying for it in the long run.
If you find that you have any tax compliance issues, or have been picked up for an audit, then you may need to reach out to the attorneys at The Wilson Firm. The attorneys specialize in guiding clients through tax and penalty relief, defending against IRS audits, and mitigating criminal tax issues.
