One of the top five small business tax mistakes, according to Rowe Sanders LLC, a legal firm based in Watkinsville, GA, is failure to deduct valid business expenses from tax returns. This problem is partly the product of a common expense-tracking pitfall; the failure to distinguish between capital and normal business expenses and the consequent inability to properly account for the spending.
The tendency for business owners to only review expenses at the end of a month is a prevalent expense-tracking pitfall, warns William Olsen of Accounting Web. This practice makes it harder to recall some spending details and may eventually make preparations for a tax season more difficult. In addition, this pitfall may make it harder to keep to a budget. To solve the problem, Olsen recommends reviewing receipts and expenditures at the end of each week. This approach also makes it easier to spot tax-deduction opportunities.
Another common expense-tracking pitfall is failure to save receipts, notes Rieva Lesonsky, writer for the California Small Business Development Center. Receipts are used to document tax-deductible expenses and may be required during tax auditing. Generally, receipts are required for expenses exceeding $75, explains Olsen. However, receipts for expenses of a lower value may still be demanded in cases when tax-deductible items or services are paid for in cash or where the expense is unclear. Smartphone owners can take advantage of widely available scanning apps to create digital versions of paper receipts that can be emailed or stored online.
Failing to record the reason for each business expense is another common expense-tracking pitfall, notes Olsen. To qualify for deductions, owners are required to prove that expenses have a genuine business purpose. Lesonsky recommends recording the reason for each expense on the receipt to ease the process of documentation. Wherever possible, the use of company credit or debit cards is recommended in place of cash payments to avoid accumulating a lot of paper receipts, notes Maggie Sieger, writing for Realtor Mag, as this approach can ease the process of claiming tax deductions.
Overly detailed documentation is another prevalent expense-tracking pitfall, explains Olsen. For instance, the practice of logging odometer readings at the start and end of every business-related trip is erroneous. Because tax calculations are based on the total miles traveled in an year, all that is needed is the reading on the odometer on the last day of December. This reading also serves as the starting odometer reading for the next tax season.
Failing to distinguish between personal and business spending is another expense-tracking pitfall, warns Lesonsky. Not only can the practice introduce unnecessary complexity during the process of accounting, but it may also attract the attention of the IRS. To ease the considerable complexities of expense tracking, Lesonsky recommends the use accounting software.
Photo courtesy of worradmu at FreeDigitalPhotos.net
Become a member to take advantage of more features, like commenting and voting.
Register or sign in today!