Business owners don’t often make calculated decisions to avoid intentional tax mistakes.
Mistakes are often made due to many reasons. It’s a lack of knowledge, expertise, or understanding of rules and how they need to be applied.
But the thing is, when it comes to taxes, mistakes can be costly. They can and will land you in trouble, and you’ll notice the consequences sooner rather than later.
If you want to avoid tax mistakes, this post is going to look at some of the more common tax mistakes business owners make without realizing.
Misclassifying Assets
How you classify your assets determines how they’re depreciated. And if you get it wrong from the beginning, you’re making many years of incorrect decisions.
Equipment that qualifies for accelerated depreciation under Section 179 or bonus depreciation getting treated as long term means it gets written off more slowly than it should be.
And the same can happen in reverse, too, if it should be capitalized and expensed immediately, but you wrongly classify it as a Section 179, this can trigger an audit.
You need to make the right classification at the beginning. If you’re not sure, get assistance on the topic so you’re clear from the beginning on how to approach this moving forward.
Missing Depreciation You’re Entitled To
Decorations are pretty straightforward and are one of the most straightforward tax decisions you can make. But it still often gets missed or underused.
It’s either claimed at the wrong rate or missed altogether on eligible assets. In some cases, business owners can miss the window on the bonus depreciation in the year an asset is eligible.
And the difference can add up significantly over time. There may be some circumstances where you can catch it and submit an amended return, but if you get it wrong once, there’s a limited chance to rectify it this year down the line.
Again, expert IRS or tax advice helps you understand what the rules are around depreciation, so you can submit claims properly.
Overlooking Cost Segregation
Cost segregation is a legitimate tax strategy. And also one of the least utilized options for commercial property owners.
It involves a detailed engineering analysis of your building to reclassify the components. This is aspects like electrical systems, flooring, fixtures, and improvements, etc.
And you can shorten the standard 39-year depreciation cycles to 5, 7, or 15 years. The result here is significantly accelerated deduction,s not your table income being spread over nearly 4 decades.
It’s worth having a cost segregation study undertaken here to see if or how it can benefit you and implement it sooner rather than later if you qualify.
Waiting Till Tax Season To Look at Numbers
The last thing you should be doing is leaving your finances until your accountant asks for them come tax season.
Because if mistakes have been made, it’s likely already too late to rectify them.
Quarterly reviews give you more time to act. They give you time to make additional retirement contributions, for example, or to make large purchases or identify an expense category that’s running higher than it should be.
And when you look at business owners who consistently pay less tax, it’s because they know their numbers, they are proactive in making the right decisions, and they aren’t leaving anything till chance or the last minute.
Assuming Last Year’s Tax Rules Still Apply
Things change year on year, and going into your taxes assuming that what you did last year still applies will only lead you to making unnecessary mistakes.
Tax laws change, your business will change, and what made sense two years ago might be redundant today.
If your business has grown, changed structure, added property, taken on more staff, or anything else, then your tax position will be different. And blindly applying the previous year’s approach is instantly wrong.
You need regular conversations with your accountant prior to submitting your taxes to understand where you are this year and what is different. This means you can apply the changes you need to so filings are correct, no amendments or adjustments are needed, and nothing triggers a review.
Not Separating Personal and Business Finances
Mixed finances can create a huge problem for taxpayers, especially when submitting personal and business taxes. If personal expenses are paid up on business credit cards or vice versa, it’s gonna look messy and cause many mistakes.
You want separate bank accounts, separate cards, and spending policies so nothing is blurred and everything is kept completely separate. Put limits in place to stop things from becoming confusing and commit to them for easier accounts all year round.