Over the years, I have seen a wide variety of mistakes, some of which were very costly to business owners. The IRS and state tax code and regulations are very complex and many modifications are made each year. The complexity and frequent changes in tax code creates big challenges for business owners if they don’t have a tax expert advising them. Over the years, I have come across many mistakes that create problems for small business owners. Here are the three which seem to come up most often.

Inadequate Record Keeping

Good record keeping is key to being able to identify and justify tax deductions. The small business must be able to provide detailed information about many important deductions, or their deduction may be disallowed. For example, you should keep receipts for cash purchases so that you can identify and prove the deductions, as well as showing the sales tax you paid for Use Tax calculations. The California Board of Equalization has recently stepped up the reporting requirements for Use Tax for many businesses, and has been sending letters to business owners to gain compliance. Another example is that businesses are required to be able to provide information about deducted meals, including who was taken to lunch or dinner and where the meal took place, along with the cost and the purpose of the meal

Not Keeping Each Year Separate For Tax Purposes

The income taxing authorities work on a strict one year basis. It is possible for small business corporations to set up a fiscal year that is different than the calendar year. But this must be applied for, and then all records must be properly allocated to the correct year. Most tax returns are filed on a “cash” basis, which means the income is recognized for when the money arrives not when is it owed as far as tax purposes are concerned. Likewise, deductions are based on when the bills are paid, not when they are due.

Not Planning Ahead For Taxes

Many small businesses do not think very much about taxes until the year is over and they need to file the tax returns. This is a very costly mistake because when the year is over, it is too late to get additional deductions. When doing tax returns for my clients, I always discuss with them what the tax reduction opportunities are for the coming year. I also meet with my clients three or four months before the end of the year so that we can review the business results and decide if any actions should be taken right away to improve the tax picture for the year.

Stay tuned to to this bi-weekly feature – I will be answering other questions I hear often, such as:

  • What is this “Use Tax” all about?
  • What deductions should businesses look into for their 2009 taxes?
  • What actions can a business take to reduce their taxes for 2010?
  • What should businesses do to make tax preparation easier for 2010?

Irene Meyer-Lopez
President, Meyer-Lopez CPA