Tax-related matters are always complicated for individuals to understand since there are convoluted regulations that people find difficult. So, it shouldn’t surprise anyone when companies encounter a similar problem with their taxation-related responsibilities. Sometimes, organizations don’t bother to understand taxation issues and eventually get on IRS’ wrong side.
Small firms interact with IRS more often given their extra tax-related duties. Learning about these problems will help you avoid penalties, steer clear from audits, and ensure a flourishing organization. Now, which tax-related issues do companies face in general? We’ll explain here some major issues businesses struggle with while filing taxes:
Eight major taxation problems for business owners
- Not finding proper forms
Depending on the nature/type of your business, you have to send different forms and payments to the IRS. It then becomes difficult for a company to understand its tax-related responsibilities at times. Some taxes are filed annually, while others are submitted quarterly (sales/income). Similarly, we have W-2 and 1099 forms that allow employees and freelancers to file their taxes. We recommend using some bookkeeping software solutions and get an IRS-issued “taxation calendar” to learn all due dates.
- Not reporting cash payments
Small firms often neglect to mention cash-based payments received from contractors. It’s essential to report all income, whether revealed on forms 1099 or not. So, we suggest hiring experts to ensure that your books are accurate. Distance learning has made it convenient for tax-savvy students to enhance their academic prowess. So, you can hire someone who has pursued Tax LLM online to manage your books expertly. These professionals can leverage their online education to maneuver through tax-related problems.
- Mixing personal with business
The IRS disapproves of mixing personal with business expenditures. However, business owners sometimes accidentally combine these two aspects of their lives. Besides, it’s essential to keep business-related expenses separate from personal ones. So, you must get another bank account for these expenditures. Also, remember to use a business-exclusive credit card while purchasing something for the business. It’ll allow you to document commercial payments properly and keep the books clean for IRS.
- Misunderstanding evasion vs. avoidance
Some firms have problems with understanding how evasion differs from avoidance in taxation. Well, avoiding taxes means finding legitimate deductions to decrease how much taxes you’re due to pay. But evading taxes involves illegal means to reach the same objective. Trying to avoid taxes isn’t easy at all, and you’ll be walking on thin ice. But tax evasion – detected by the IRS – will land you behind bars. So, it’s imperative to understand how you can avoid taxes while not evading them illegally.
- Not reporting sales taxes
Another problem that baffles small firms is reporting sales taxes – especially when you’re an online seller. For example, companies using Amazon for product fulfillment ship products from warehouses located in different states. California went after such sellers recently. Similarly, you can’t let the IRS detect off-the-books payments your workers receive from you. If they mention your company as a source of income, the IRS can even label it as fraud, which may lead to criminal proceedings.
- Not making proper deductions
Small firms enjoy several taxation-related deductions or “write-offs,” e.g., ads, meals, offices, travel, and many more. It’s essential to learn about the tax deductions you deserve since mishandling deductions on your taxes may lead to an unavoidable audit. Remember that legitimate deductions can sometimes displease the IRS if they’re disproportionate to your earnings. For instance, showing loss instead of profit over many years can result in the IRS declaring your business as merely a hobby.
- Forgetting about quarterly payments
Traditionally, employees have W-2 forms where companies report salaries paid to workers annually while payroll taxes are withheld from these paychecks. If you’re a self-employed business owner, you might withhold payroll taxes from annual compensations.
The IRS expects you to send quarterly tax payments for taxation liabilities over $1,000. According to 2021 rules, 3rd payments are due on September 15, after which the next ones will be due on January 18. Forgetting these payments happens to be a significant issue for small firms.
- Misreporting business expenses
Many companies attempt to over-underreport their expenditures to avoid taxes. It may seem tempting to underreport how much money your business has made. But living in today’s digital world has made it difficult for companies to hide their incomes. Transactions are made today via electronic processors, e.g., PayPal, thereby providing a digital money trail. Forgetting to report some petty income sources may be deemed as an oversight by the IRS. Though repeating such mistakes can lead the IRS to take stern actions against your establishment. Again, we suggest bringing experts onto your team to enhance your organization’s bookkeeping capabilities.
Companies have more taxation-related responsibilities than individual taxpayers. While the IRS audits 1% of taxpayers, almost 2.5% of businesses have their books inspected annually. Several problems compel the authorities to suspect you’re not truthful about how much money you’re making. So, underestimating your income or illicitly claiming dependants may lead to an audit. Claiming false expenses or neglecting those 1099s forms can cause taxation problems for your business as well. A straightforward solution lies in hiring a taxation professional who is well-versed in dealing with such issues. This expert can deal with the IRS and ensure that your books are always clean and tidy for an audit.