Six Common Tax Mistakes That Startups Face
As a young or fresh startup, your major concern would be things like finding the right investors or hiring the best team and you would be less concerned with preparing for tax seasons.
It doesn’t matter if it’s a small establishment or a big enterprise, managing your business during the first few months is usually a difficult task. However, if you can successfully overcome the obstacles in your path and do not wait until the last minute to file taxes, then you will be able to avoid making some common tax mistakes.
You do not have to be an expert to be able to avoid some of the common tax mistakes. All you need to do is to plan well and follow the advice given to you by professionals.
This way you can make sure you do not make the same mistakes your fellow entrepreneurs have made in the past such as getting a penalty from the IRS.
To that end, let’s discuss six of the common tax mistakes that startups face
1. Not keeping a proper record of all your expenses:
This is one of the greatest mistakes startups make. The moment you launch your business you should be able to deduct all compulsory and ordinary expenses.
In this digital age, it is easy to keep track of your expenses with the help of accounting software that works for you, like Fresh Books, Expensify, Milebug, Mint or QuickBooks, and Shoeboxed for capturing paper receipts.
With this, you can manage your records well, by keeping track of your expenses, saving receipts, and putting them all together in one place. This will make filing your taxes easier.
2. Not talking to experts:
Another big mistake startups make is trying to do it all alone without seeking advice from professionals or experts. When you do not talk to experts or professionals you end up losing more money.
3. Combining business and personal finances:
Combining business and personal finances is a very wrong idea. Many business owners say they do not have separate accounts for business and personal use because it seems to be very tricky. This is a problem because with mixing business and personal finances, you wouldn’t know how to tell which expenses apart. This makes it difficult to tell what should be deductible for taxes. So, over time, failure to account for your expenses will lead to loss of money and also loss in tax deductions.
The best way to avoid this problem is to open or establish a financial account for your startup business from the first day. Also, make sure you maintain separate records for all your business transactions.
4. When you do not register in every state or country you do business in
Most startups tend to have customers and employees across the country and the globe. Most startups fail to understand that having customers and employees in other states means they need to file a return for each of these states.
Also, the Supreme Court has made it known again that legally, a company must pay taxes in every state or country in which it does business.
This also applies in cases where the company does not have employees or properties in the state. Once the startup ships product or renders services in this state, you owe state tax in those states.
5. Not sending 1099s
As a startup, if you work with freelancers or maybe contractors, 1099s are very important. If you have probably had to hire contractors and if you have paid any of these contractors more than $600 throughout the year then you need to issue the form (1099-MISC) to the IRS and the individual.
The copy should also be sent to the contractors by January 31st and the IRS by February 28th. If you are filing electronically you need to send a copy by March 31st. But if you did not file form1099s and you used a contractor that you paid more than $600 then you could be fined up to $200 for each type of form that you don’t send. You could also be fined if you passed the deadline. This is why you should make sure you send 1099s forms to your contractor on time so you don’t face major fines or unnecessary bills.
6. Writing personal deductions
Your personal and business finances can be difficult to separate at the beginning because you have invested so much money and so much time too. This could cause so much confusion when it’s time for tax. The IRS rules state that “you cannot deduct family or personal expenses on your business tax return”. Still, as a startup owner, you could be using some equipment such as your laptop, computer, and your car for business and personal use, in this kind of situation you can deduct the portion of expenses used for business. If you use your computer 30% 0f the time for business, you can then deduct not more than 40% of the cost used.
I believe once you read through and understand how to avoid these mistakes above. It would make your life easier. If you keep to these tips, you’ll be done with your tax in no time and be able to attend to things that matter like growing your startup. Most importantly all startup or business owners should always think of taxes as a year-long obligation, not just something that you revisit once a year.