6 Common Mistakes Business Owners Make on Their Taxes

Filing your small business’s tax return may be a dreaded task you’re tempted to put off until April 14, but we advise that you don’t. That’s because mistakes are made when you’re in a rush, resulting in interest charges, penalties or unwanted attention from the IRS. Mistakes can be avoided by being prepared and planning ahead. Here are the 6 most common tax mistakes business owners make:

Mistake #1: Filing late

It’s important to file your taxes on time to avoid a 5 percent per month penalty by the IRS (that increases until the return is filed), a 6 percent interest penalty and a late payment penalty. You can request a filing extension, but you will still need to pay a portion by the original due date. It’s better to avoid the headache, be organized and file on time.

Mistake #2: Not paying estimated taxes during the year

If you are a sole proprietor, S corporation, are self-employed or a partner and you expect to owe $1,000 or more when you file a return, you are required to make estimated tax payments throughout the year. The same is true if you are a corporation expecting to owe $500 or more in taxes.

Mistake #3: Not having organized, visible financials

Using Excel to track your income, expenses and receipts might suffice when you are first starting out, but once you get bigger you will need a program that is more robust. Your financials need to be up-to-date, accurate and all in one place so you can make good tax and cash decisions.

Mistake #4: Intermingling personal and business expenses

It’s important to keep your business expenses separate from your personal ones. You can do this by having a separate bank account and credit card for your business, and always use your business credit card for business expenses. Even if you purchase both personal and business items at an office supply store, use different credit cards to pay for them so you can keep those expenses separate.

Mistake #5: Not tracking expenses

Throughout the year you need to save receipts, log the business miles you put on your car and track your expense categories. Did you know that only 50 percent of certain business meals are deductible? Platforms like QuickBooks and Freshbooks can help you keep track of expenses, and apps like MileIQ can track your business mileage.

Mistake #6: Not getting professional help

It may be tempting to save money and do everything yourself, but unless you know what you are doing, it could cost you time, money and headaches in the end. Consider consulting with a bookkeeper or accountant throughout the year to make sure you have good processes in place come tax season.

Donohoo Accounting Services has more than 20 years of experience helping clients with their tax and financial issues. Advising small businesses on their taxes is what we do best. If you have any questions about preparing your taxes or would like to know more about the services we provide, please call us at 513-528-3982 for a free consultation.

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Year-End Tax Moves To Make Now

Most people don’t think about taxes when it’s not tax season, but you absolutely should. 2020 has been unusual in every way, and the upcoming tax season will likely follow suit because there are tax moves you can make before the end of this year that will benefit you once you file. Here are a few that we suggest:

Track receipts

If you are self-employed and working from home, you can deduct your office space (it has to be used just for work) and any expenses you incur. If your income was lower than usual but your medical expenses were higher, you might qualify for deduction. Best practice for 2020? Save your receipts.

Don’t forget about other taxable income

Many people were furloughed or lost their jobs this year because of the stay-at-home order. If you picked up a side hustle to make ends meet, your earnings are considered taxable income, even if you don’t have official paperwork that details the money. Unemployment benefits are taxable, too. If you received any of those, you’ll have to fill out a 1099-G form and enter those amounts on your tax return. If withholdings weren’t taken out of those payments, you’ll have to make up for it when calculating your 2020 estimated tax payments.

Max out for retirement

If your income went up this year, it’s the perfect opportunity to reduce your tax liability by increasing your contribution to your retirement account.

Conversely, if your income went down and you had to borrow from your retirement account, you won’t pay penalties but you will have to account for that on your taxes for the next three years.

Make the most of your savings

If the stay-at-home order resulted in prepaid vacation refunds, fewer travel expenses or less spending in general, you may find yourself with a slightly larger wallet. If that’s the case, make the most of that money by investing it now in a long-term savings account, such as a 529 or Roth IRA.

Check your withholdings

If your income has changed, check your paycheck to make sure you are withholding enough for federal taxes to avoid penalties and interest to the IRS. The IRS has a tool to help you do this, but you will have to manually calculate it for your state withholdings.

Revisit your stimulus eligibility

If your income decreased in 2020, you might qualify for the stimulus payment made available from the CARES act, even if you didn’t qualify in 2019 or 2018. There will likely be extra documentation to fill out with the IRS Form 1040. The credit will automatically be applied if you are eligible.

We understand that tax filing can be overwhelming in the most normal of situations, so it will be especially challenging when filing for this year. We also know you have a life to lead and business to run, so let us handle your accounting issues and headaches. If you have any questions about what you should be doing now for the upcoming tax season, please reach out to Donohoo Accounting Services today at 513-528-3982 for a free consultation.

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What Are The Basics Of Accounting Methods

What are accounting methods? Accounting methods help businesses keep their cash records and assist in preparing money reports by utilizing two fundamental methods of record-keeping for cash.  These two methods are cash-basis and accrual basis accounting.  These methods both have their own distinctive advantages of keeping corporate record keeping which help keep track of money coming an and out of the business. Donohoo Accounting knows what are the two types of accounting methods and how to utilize the for your business.

 

Accounting methods help businesses keep their cash records and assist in preparing money reports by utilizing two fundamental methods of record-keeping for cash.
Accounting methods help businesses keep their cash records and assist in preparing money reports by utilizing two fundamental methods of record-keeping for cash.

 

CASH-BASIS ACCOUNTING

What is cash-basis accounting? Corporations recording expenses in financial accounts when the cash is laid out, and they book revenue when they actually hold the cash in their hot little hands or, more likely, in a bank account. For example, if a plumber completed a project on December 30, 2018, but doesn’t get paid for it until the owner inspects it on January 10, 2019, the plumber reports those cash earnings on her 2018 tax report. In cash-basis accounting, cash earnings include checks, credit-card receipts, or any other form of revenue from customers.

 

Corporations recording expenses in financial accounts when the cash is laid out, and they book revenue when they actually hold the cash in their hot little hands or, more likely, in a bank account.
Corporations recording expenses in financial accounts when the cash is laid out, and they book revenue when they actually hold the cash in their hot little hands or, more likely, in a bank account.

 

ACCRUAL ACCOUNTING

Does your company use accrual accounting? This method is when you record revenue when the actual business is completed ex. (is when the completed amount of work that was stated in a contract agreement between the company and its client), not when it obtains the cash. The company records income when it produces it, even if the customer hasn’t paid yet. For example, a plumbing contractor who uses accrual accounting records the revenue earned when the job is completed, even if the client hasn’t paid the final invoice yet. Expenditures are handled in the same way.

 

The company records income when it produces it, even if the customer hasn’t paid yet.
The company records income when it produces it, even if the customer hasn’t paid yet.

 

BASIC ACCOUNTING TERMS

  • Equity: The net worth of your company. Also called owner’s equity or capital. Equity comes from investment in the business by the owners, plus accumulated net profits of the business that have not been paid out to the owners. It essentially represents amounts owed to the owners. Equity accounts are balance sheet accounts.

 

  • Assets: Things of value held by your business. Assets are balance sheet accounts. Examples of assets are cash, accounts receivable and furniture and fixtures.

 

  • Liabilities: What your business owes creditors. Liabilities are balance sheet accounts. Examples are accounts payable, payroll taxes payable and loans payable.

 

  • Debits: At least one component of every accounting transaction is a debit amount. Debits increase assets and decrease liabilities and equity.

 

 

While all these terms may seem a foreign language or a little overwhelming they can keep your business finances in order and make tax time a lot easier when it comes time to file.  Making the everyday accounting run smoothly can be done with Donohoo Accounting Services. Call us today for your free evaluation and let us take the stress out of your day-to-day money functions.

Are Your Business Receipts Audit Ready?

Do you often ignore or say too quickly “No” when asked whether you want a receipt?  Not small-business owners. Knowledgeable business owners just know how to keep receipts. If they don’t, their tax return could be at risk. The question is: Are your business receipts audit ready?

  1. TAKE NOTICE

The first mindset to get into (especially if you’re trying to prepare your receipts for taxes) is creating a tiny note of the business purpose on the receipt. Whether or not you inscribe directly or put aside time at the top of the day, week, or once a large amount of buying has been completed (say at the end of a business trip for example), you’ll need the purchases to be recent enough in your mind that you will remember to label them properly.

Be sure that you create the note because this one thing which will permit you to classify the expense later. Merely writing “lunch” might not be enough to jog your memory if you’re audited a year or two later.

  1. CLASSIFY

Now that you’ve taken note of all these numbers, the next step is following and organizing it, so you can put the receipts into specific classifications. This will make tax time a breeze and permit you to refer back to any receipts without having to look through tons of files.

Here are some samples of common classifications for tax-deductible purchases:

  • Advertising: includes things such as business cards, mailing lists/mailing list software, brochures, outside marketing company, website design, development, and maintenance.

 

Advertising: includes things such as business cards, mailing lists/mailing list software, brochures, outside marketing company, website design, development, and maintenance
Advertising: includes things such as business cards, mailing lists/mailing list software, brochures, outside marketing company, website design, development, and maintenance.

 

  • Travel: there are certain criteria to meet for travel expenses to be deductible, but items that may be included are lodging, meals, airfare, baggage & shipping, rentals, taxis, dry cleaning and mileage, and parking expenses.

 

 there are certain criteria to meet for travel expenses to be deductible, but items that may be included are lodging, meals, airfare, baggage & shipping, rentals, taxis, dry cleaning and mileage, and parking expenses
there are certain criteria to meet for travel expenses to be deductible, but items that may be included are lodging, meals, airfare, baggage & shipping, rentals, taxis, dry cleaning and mileage, and parking expenses.

 

  • Entertainment and Meals: These items may be examined thoroughly by the IRS so be sure these items get listed correctly such as from a business trip.

 

  • Legal and Professional Fees: attorney’s fees, accountant’s fees, other professional consultants’ fees directly related to your business.

 

  • Indemnification: may include business liability insurance premiums, property insurance premiums, disability premiums, workers’ compensation premiums for employees.

 

  • Professional Dues and Licenses: may include franchise fees, professional license fees, business licenses.

 

  • In-Kind: Gifts given to business contacts are deductible but are limited to $25 per person, per year.

 

In-Kind: Gifts given to business contacts are deductible but are limited to $25 per person, per year.
In-Kind: Gifts given to business contacts are deductible but are limited to $25 per person, per year.

 

  1. BE THOROUGH

A crucial step is organizing your receipts and being thorough with your method. Attempt to keep expenses separated by paying with a “business only” designated credit card or bank account when possible and avoid paying in hard cash.

Over time you may find better and newer apps to help manage your receipts but remember to keep using the same classifying process.  By keeping your method, you will be consistent in your receipts collecting and keeping all the overall information easily acceptable to you and your accountant

Duane Donohoo being self-employed himself understands the challenges of owning a small business. He understands the burden the IRS can be to a small business or individual. It was this experience that relates to his self-employment clients and individual clients. Call today (513-528-3982) for a free consultation to find out how Donohoo Accounting Services, Inc. can serve you.