Common Tax Mistakes Businesses Make

No business owner sets out to make tax mistakes, but between the complexity of the tax code and using your CPA for after-the-fact tax advice, mistakes happen. Here are some of the most common mistakes businesses make, so you can learn to avoid them:

Not engaging a tax professional.

  • Once midnight strikes on December 31st, there’s nothing you can do to account for last year’s taxes. It’s recommended that you spend the month of December to organize and prepare your taxes from the previous year. Consult with a tax professional to help you through this process before it’s too late.

Failing to maximize retirement contributions.

  • Maybe you don’t have the right retirement plan. There are plans beyond 401K’s and IRA’s that offer more flexibility on how to make your retirement contribution.

Misclassifying employees.

  • The IRS and states offer a long list of criteria that will help you distinguish the differences between employees and independent contractors. Mistaking one for the other will not only cause tax complications later, but could also result in some liabilities.

Mismanaging your company’s tax status.

  • Whether you’re a C corporation, an S corporation, an LLC, a partnership or a sole proprietorship, figuring out which business model suits your startup the best will save you a lot of headaches when it comes to taxes later on.

Owning the real estate inside the company.

  • It’s best to separate your company and real estate entities and treat yourself as your landlord would: have a lease and keep your personal entity at arm’s length. This will afford you significant flexibility when it comes to paying your taxes.

Improperly structured continuity agreements.

  • Whether it’s old, the valuation clause doesn’t work or there’s no funding for it whether it’s through life insurance or a sinking fund, improperly structured continuity agreements will cause some complications during tax season. Stock redemption agreements or cross-purchase agreements could complicate matters even more.

Depreciation or write-offs.

  • When it comes to buying equipment, if you’re in a low tax bracket you probably don’t want to write it off and stretch it out over the life of the equipment (7-10 years). Conversely, if it’s December it might make sense to buy your equipment for January and write it off immediately.

Managing business taxes is never easy, but by keeping the above tips in mind, you will certainly decrease the amount of mistakes you make along the way.

John Napolitano, Chairman and CEO of U.S. Wealth Management, offers tips on maximizing your tax returns as an entrepreneur.