Is your small business getting ready to prepare and file your tax return? Errors on your tax return can delay the processing of your return, in addition to, the tax refund you’re counting on. Fortunately, many of the most common mistakes can be avoided.
Spending a little extra attention to a few things will make tax time a much smoother and error-free process. To help you file an error-free tax return, be sure you’re not falling prey to one of these all-too-common mistakes business owners make during tax time.
• Forgetting to Register in Every State in Which You Do Business: Incorporated in Maryland but sell to customers in Virginia? Your business needs to file returns in both states. In fact, as the Supreme Court recently clarified in its major decision in South Dakota v. Wayfair, a company is legally obligated to pay taxes in every state in which it does business—even if the company has no property or employees located within the state. If you operate an e-commerce company, for instance, you may owe sales taxes to every state you’ve shipped an order to in the last 12 months. The same is true for many service providers.
• Have Employees Located in Other States?: Many startups and small businesses also don’t realize that they may need to file returns for states in which their employees are located. If your Maryland-incorporated has a founder in Wisconsin and a programming team in Washington, you may be looking at three separate state forms (note that contractors don’t count).
• Neglecting to Amortize Pre-Revenue Expenses: Becoming profitable takes time—and more than a little upfront investment. Before launching a restaurant, for example, you might need to purchase equipment, recruit chefs, develop menus, obtain a liquor license, and so on. The pre-revenue process could last months and demand a considerable chunk of money. A business doesn’t necessarily need to report those expenses on their tax return and take the expenses all at once. Instead, the company can choose to offset its costs through amortization. When you amortize an expense, you write off its initial tax burden and pay it back incrementally. You simply capitalize the expense, put it on your balance sheet, and then pay a percentage of taxes on it over the course of a set number of years in the future.
• Filing as the Wrong Business Entity:As you probably know, most businesses in the U.S. fall into one of five categories: limited liability companies (LLCs), partnerships, S corporations, C corporations, and sole proprietorships. Although your business entity type may change over time, the form you file in your first tax year often has implications for your future filings. When your business incorporates as a partnership or an LLC, how you file in your first year sets an important precedent.
An LLC is not a federally defined business entity, but a state designation. If your company does business as an LLC, the IRS will treat it as an S corp or partnership, or—for sole proprietors—a disregarded entity. (In IRS-speak, “disregarded” means the business is not separate from its owner.) Single-owner LLCs may be taxed as disregarded entities or S corps. Companies with more than one owner are taxed as partnerships. Keep in mind these designations are only for tax purposes; they don’t change anything with your state, but they do affect which federal forms you’ll need to file this year and next.
Don’t Handle Your Taxes AloneThese are just a few of the potential mistakes business owners make when they attempt to manage their taxes without professional support. There are plenty of other common pitfalls (Did you know, for instance, that you need to pay $10,000 per foreign owner or subsidiary in your company?). Don’t take on tax season alone. The tax and accounting professionals at Goldin Group can help you organize and prepare all the paperwork you need, save money on filing, reduce your tax liability, and minimize your chances of receiving that dreaded IRS letter. If you are a small business that is looking to outsource your accounting or if you need help managing any aspect of your business’s or nonprofit’s finances, we want to hear from you. Call us at (301) 913-0008 or email firstname.lastname@example.org to make an appointment.