Businesses, Watch Out For These Five Common Tax Mistakes
By Kelly Walsh, Esq.
Scaringi Law Associate Attorney
Keeping up with expense records, tax forms and quarterly estimated payments can be a huge challenge for businesses. And while a basic tax service or software program may correct arithmetic errors and fix typos, they typically cannot delve into the nitty-gritty of tax law updates and business record-keeping to justify deductions.
In facing tax season, businesses should beware of these five common mistakes:
1. Panicking over the Affordable Care Act
Despite fears about the impact of the Affordable Care Act on business's bottom line, most will be untouched by the reporting requirements and employer shared responsibility provisions that are being rolled out this year.
Only so-called "Applicable Large Employers" (ALEs) - businesses with at least 50 employees during the previous tax year - will be penalized by the employer shared responsibility provisions if they fail to provide the minimum coverage to full-time employees and their dependents at an "affordable rate."
If coverage would cost the employee more than 9.5 percent of his annual household income, it is deemed unaffordable. If an ALE fails to provide coverage, the business may be responsible for a "shared responsibility payment." This happens when the employee gets coverage from the Health Insurance Marketplace at a lower rate than the employer's, with the employee also receiving a premium tax credit. These employers also have tax reporting requirements regarding the insurance they provide.
But this is the exception-- most businesses have no added obligations under these provisions of the ACA. If your business has fewer than 50 employees and the insurance you provide is not self-insurance, you are exempt from both the Employer Shared Responsibility provisions and the Employer Reporting Requirements. Businesses with more than 50 but fewer than 100 employees must comply with the Employer Reporting Requirements, but they are exempt from the Employer Shared Responsibility provisions as part of the 2015 transition relief program.
2. Failing to appreciate depreciation
Did you buy new office furniture? A fleet vehicle? With depreciation, you can reduce your company's taxable income for the next 10 years, based on purchases you would likely make anyway. But if you depreciate incorrectly, you'll raise eyebrows at the IRS. With differing rules for various business expenditures, beginning with Schedule E on the 1040 IRS form, it pays to consult a professional.
3. Quarreling over quarterlies
When you own a business, the IRS likes to see its tax money every quarter. Businesses file form 1040-ES when submitting estimated taxes every three months. This helps business owners avoid large tax bills at the end of the year. It also keeps businesses off the hook for certain penalties and interest. If you expect or experience a big change in business income, you may need to recalculate your quarterlies.
4. Short-changing your retirement
Business owners must also file and pay Self-Employment Tax. If your profits (net earnings less losses, typically determined from 1040 Schedule C) were more than $400 for the year, you must file Form 1040 Schedule SE and pay an additional 15.3 percent tax on those earnings, to include a 12.4 percent Social Security tax and 2.9 percent Medicare tax.
For the self-employed, who don't receive a paycheck with Medicare and Social Security taxes withheld, you are responsible to pay into these funds on your own, giving you access to these social safety nets when you retire.
If you minimize your income too dramatically and pay only a paltry amount in Self-Employment Tax, your Social Security benefits later in life may be equally anemic. This can also reduce your benefits under Social Security Disability Insurance should you become unable to work.
5. Debatable deductible expenses
Legitimate business deductions are the IRS's way of recognizing that you had to spend money to make money. It is up to you to track and organize those expenses into categories, retaining all records to justify deductions. A knowledgeable business tax professional can help with the deductions you're entitled to, what records to keep, and how to track expenses.
Be honest about expenses. Travel expenses must be primarily for business purposes. Attending a business conference in Maui with a little personal pleasure mixed in is generally okay. But trying to deduct a personal vacation by tacking on a brief business meeting is a dubious deduction.
Armed with the right professional guidance, however, you can confidently claim legitimate deductions for client dinners, business mileage, professional fees, advertising costs and more.
These steps will keep the IRS and an intrusive audit away.
To learn more about how Scaringi Law attorney Kelly M. Walsh can help you, call her toll-free at 877-LAW-2555 or email her at email@example.com.