Richard A. Lindsey, CPA

Lindsey & Waldo, LLC – Certified Public Accountants

  • Aug 3

    In the flurry of launching a new business, filing your taxes may well be one of the last things on your mind. But, you don’t want to wait until the last minute to figure things out. At best, you could leave money on the table – at worst, suffer penalties or other legal ramifications.

    Avoiding these common startup bloopers can ensure your new business is on the right track to handling its tax obligations properly.

    1. Not keeping track of all of your expenses
    From the moment you launch a business, you can deduct “all ordinary and necessary” business expenses such as office supplies, professional fees, and business mileage. Your biggest mistake is not keeping track of these expenses throughout the year, and trying to gather every receipt when it’s time to file. The bottom line is you can’t deduct what you can’t document, and failing to record as you go most likely means you’re forgetting expenses and leaving money on the table.

    Find a method for documenting expenses that works for you. An accounting program, such as QuickBooks®, will let you record and manage revenue and expenses. In addition, there are dedicated apps such as Expensify for tracking expenses, MileBug for recording mileage, or Shoeboxed for capturing paper receipts. The best method is whichever one you will consistently use.

    2. Mixing personal and business
    New startups and small business owners often invest so much of themselves, their time and their money, into their new company that it’s hard to separate them. But separate them you must! The mixing of business and personal funds makes it extremely difficult to make sure you deduct all of your business expenses and only your business expenses. At the very least, you must have separate business and personal checking accounts. Just imagine the look on an IRS auditor’s face when she finds out you can’t tell your business and personal expenses apart.

    3. Choosing the wrong legal entity
    Your business’ legal structure affects how you report your taxes and how much you pay, so it’s important to choose the right entity. For example, many start out as a sole proprietor or partnership because it’s easiest, but soon find themselves paying way too much in self-employment taxes. Creating a corporation can help lower their tax bill significantly.

    4. Mixing equipment and supplies
    Both first-time and experienced business owners get tripped up by what is considered equipment versus supplies. Equipment are often higher value items that will typically last longer than one year, while supplies are generally things that you use up during the year.

    When it comes to equipment, there are a couple of approaches: 1) You can recover a portion of the cost each year, or 2) you may qualify to write-off the full amount in the year of purchase. There are, naturally, some restrictions on the ability to deduct the full amount. Be sure you talk to us first to find out if you qualify.

    If you mistakenly deduct your equipment or other capital item as an operating expense such as supplies, the IRS could determine that you’re not entitled to any deduction.

    5. Not sending Forms 1099
    When you pay any freelancer, contractor, attorney or other non-corporate entity $600 or more for services over the course of the year, you’re required to issue Form 1099-MISC and send copies to both the entity (business, contractor, individual, etc.) and the IRS. If you fail to do so on time the penalty can be as high as $520 per occurrence.

    6. Deducting too much for gifts
    Maybe you sent some of your best clients a holiday present, or sent them a closing gift after a large purchase, or sent a colleague a thank you gift for an especially nice referral. Great! Business gifts are deductible, but there’s a big catch. You can only deduct $25 per gift. So, if you send Paula a $150 fruit basket, you only get to deduct $25 for it.

    Documentation is going to be important. If you report $2,500 in business gifts, you need to be able to have documentation that shows you gave gifts to 100 different people.

    7. Not making estimated tax payments
    If your business is any legal form other than a C corporation you are personally going to be liable for paying taxes on the profits you earn. Business owners are required to pay in sufficient taxes to cover their expected tax obligations. Those payments can be in the form of payroll withholding – if you or someone in your household qualifies – or through quarterly estimated tax payments. Even if it wasn’t required, it is generally easier to make smaller payments on a quarterly basis than to have to pay the entire bill at year end.

    The best way to stay on top of your estimated tax payments is to get into the habit of setting aside a percentage of your revenue on a regular basis. Then, on a quarterly basis, review your revenue and expenses, calculate your tax liability, and make the appropriate payments.