Business Tax

Top 10 Common Business Tax Mistakes (and a bonus mistake)

Common Business Owner Mistakes –
I commented recently on a few social posts seeking guidance on tax treatment and entity questions in general. I thought it may be helpful to make a post of some of the biggest mistakes I see business owners make.
  1. I need an LLC to have a business. All else being equal, If your business is a ‘one-person band’ and making less than $60K net per year, it’s unlikely you will have any benefit from the added expense. Some will want an LLC to show they’re a “real business,” and that’s fine, albeit don’t expect a financial benefit at all, and just an added expense. Jurisdictions vary, however, generally when you’re performing the work yourself and/or you’re personally guaranteeing any business loans, the LLC will likely not offer liability protection.
  2. If I make over X amount of money (often stated as $60K-$100K net income), I should take an S corp tax treatment election. This is one of the biggest mistakes and widely touted on social media. However, the business owner must take ‘reasonable compensation’ and that amount is deducted from QBI deduction and removes some other deductions that the taxpayer may wish were available. Plus, the added costs of an additional tax filing (1120S) and generally an accountable plan that’s required may be great for the tax professional because they earn a lot more in fees from the business owner, may offset the benefits. Generally, if it’s a wash or close, paying into SS is the better use of the money. Plus, reasonable compensation is the criteria the IRS uses, and you better have that amount professional calculated because it is NOT a percentage of total income AND there’s a look back period that trips up many business owners in a tax audit.
  3. I don’t want to take X deduction because it may trigger an audit – This is often a case by case decision and it’s very true that an audit cost can quickly overshadow any tax savings even when the business owner wins, however, when taking a deduction that is legit and well documented, usually the best course of action is to take the deduction, and explain (and document it) in the tax return. Before deciding to audit a business, the IRS will manually review the tax return, and if the ‘problem’ is well documented and substantiated in the return, the audit will often die before the taxpayer even knows they would have otherwise been subject to an audit.
  4. I don’t want to spend the money for commercial auto insurance – If you’re using your vehicle for business use, make darn sure, and get it in writing (ie email is fine) that your insurance agent not only knows what you’re doing with your vehicle, albeit is also ‘ok’ and approves it. Otherwise, you’re potentially risking all your personal assets due to a car accident that you find out you have zero coverage for. Making matters worse, you may not even be at fault, albeit if you don’t have coverage, you will have to pay out of pocket for legal defense that may leave you in a situation that you’re right, albeit can’t afford (or will cost higher) to defend.
  5. Turbotax (or any other tax program) will calculate all the deductions I have available for my business – If you’re running a business, there’s a near 100% chance that finding a quality tax advisor will result in more after tax income than DIY.
  6. My tax preparer is qualified to give me tax advise – Most tax preparers are just that, tax preparers and NOT tax advisors, and this is especially true for the big name tax preparation services which generally hire relatively new and non-credentialed people to perform tax preparation.
  7. I can hire people as 1099 independent contractors instead of W2 employees (or worse yet, pay someone cash under the table) – Just because you and the worker agree they’re 1099s ICs, doesn’t mean the IRS and/or State you’re in agree. The default is they’re an employee unless you can show (by the IRS standards, which use a 20-point factor test) they truly are 1099 IC. I have taken many calls from business owners seeking help from taxing authorities seeking thousands of dollars in past withholding and workers’ comp costs. Furthermore, generally withholding amounts can’t even be wiped out in bankruptcy. One of the most common ways the state finds out is because the worker goes into urgent care, and when they say what happened, the hospital will tag it as a workers’ comp claim, because they know they’ll get paid for the service, which then results in the state taking action against the business. It’s ugly, very ugly day for the business owner. Plus, and please don’t do this, albeit if you pay cash under the table, you can’t deduct the expense and you’ll be subject to income tax on all the money you paid in cash.
  8. I don’t know accounting, albeit I will get QuickBooks (or some other accounting program) and figure it out. Fixing business owner’s books is something my office does every day of the week and it costs a LOT more than having a bookkeeper do it right to begin with.
  9. I can only lose money for X number of years (generally people will say three) and then I can’t deduct my expenses against other income. -The actual rule (over simplification) is the operation must be seeking and have a reasonable expectation for profit. A business can lose money for more than three years and still be a business (and not a hobby) if the taxpayer can show the intent is to make a profit.
  10. I should take a ‘home office deduction’ on my personal tax return – This depends on the situation, albeit it’s generally better for the business to reimburse you personally for the expense, and not as rent, albeit as a reimbursement. If you own your home, you’re taking depreciation which is recaptured when you sell. If you business simply reimburses you, generally it receives a deduction and you don’t report it as income, and thus get all the benefit without any of the cons.
  11. I can deduct my vehicle as a business expense – This is true, however, many business owners do not either expense it correctly, or at a minimum optimize the deduction properly.