As a small business owner, tax season can be one of the most challenging and frustrating times of the year. Since you're probably not an expert on the tax code, it can be stressful to file your taxes properly and take all the deductions available to you.
With the April 15 tax-filing deadline quickly approaching, Business News Daily spoke with several tax and small business experts about some of the biggest mistakes made when filing taxes, what deductions shouldn't be overlooked and how small business owners can start preparing now for next year's tax-filing period.
Related: Interested in business tax software? Check out our best picks.
We talked with Barbara Anderson, director of product marketing for the online invoicing, accounting and billing software provider FreshBooks; Helena Swyter, a practicing accountant for creative professionals at Sweeter CPA; and Kristel Yoneda, a Los Angeles-based freelance writer and marketing consultant.
BND: What are the biggest tax mistakes small business owners make?:
Anderson: Being a small business owner is tough. There are so many demands on your time and so many hats you are required to wear. Oftentimes, the administrative or accounting work gets put on hold or delayed so that you can focus on your customers or business. One such thing that gets shuffled to the side is keeping track of receipts or expenses.
They'll be left on your desk, in your car or maybe even in a shoebox. At tax time, this becomes an issue, because you're missing expenses (and, therefore, cannot claim them as deductions), or you have to sit down and do them all at once, which takes lots of time away from your business. Business owners are better off automatically inputting and categorizing expenses into a single repository as soon as they can. This best reduces the risk of missing a deduction.
Swyter: Most of the problems and frustration I see on the part of the small business owner is when he or she has been commingling business and personal funds throughout the year and now has to dig back through bank accounts to straighten things out. It's important for entrepreneurs to establish a business bank account and to use that account strictly for business transactions. Get in the habit of paying for personal expenses with personal debit or credit cards, to avoid extra work at tax time.
Yoneda: I think many small business owners are unaware of the different tax deductions available to them. As small business owners, we are responsible for paying a pretty hefty percentage of our earnings toward taxes, but there are also many deductions that can help offset the financial burden. You just have to do your research or hire a professional to handle your taxes.
Another big mistake is not keeping meticulous records of your business expenses. Some people who run their business as a sole proprietorship assume they can just dig around for their receipts when tax season comes, but I assure you that'll be a bigger source of stress than keeping updated records of your purchases and expenses throughout the year.
BND: Is it ever a good idea for small business owners to do their own taxes?
Yoneda: I personally prefer to let a professional handle my taxes. Filing my taxes used to give me a headache, and I was always afraid of doing the forms incorrectly — so now I just let a tax professional take care of it. This was especially helpful when I moved from Hawaii to California a few years ago and had to register my business in Los Angeles. My tax expert helps me maximize my deductions, fills out all the necessary paperwork and even reminds me to pay my estimated taxes on time. This kind of help is invaluable. It allows me to focus my energy on producing quality work for my clients rather than stressing out about my taxes.
BND: If business owners ever do their own taxes, what are some key things to remember?
Anderson: It's always easiest to prepare and file your taxes when you have all of the information right in front of you. Keeping track of your income and expenses year-round in a software solution is a great way to reduce your headaches at tax time. Your info is all there in one place and pre-categorized, and it can be easily transferred to your tax software.
BND: Are there any tax-code changes this year that small business owners should be aware of?
Swyter: The biggest change for small business owners is that those who maintain home offices can use the simplified option to calculate the deduction for 2013. In the past, people who worked from home had to track various utilities and expenses pertaining to maintaining a home office, like heating, rent, maintenance, etc. For 2013, taxpayers are able to take a standard deduction of $5 per square foot of home used for business (up to 300 square feet). This greatly eases the burden on taxpayers trying to calculate the home office deduction.
BND: What are the deductions small business owners most often overlook?
Swyter: Small business owners often overlook the mileage deduction. It's worth tracking car trips — other than your standard commute — as you can deduct 55.5 cents a mile for 2013.
I also encourage clients to keep track of educational expenses, such as books, training seminars or online courses. If these items help you hone your skills as a business owner, they may be deductible.
Additionally, I find that people often forget about purchases made with cash because, unless they've held onto a receipt, they are likely to forget about the purchase entirely. Either use a business credit or debit card more regularly or establish a system to record cash expenses.
Yoneda: I think these deductions will vary by field, but as a freelance writer, it never occurred to me that I could claim business expenses such as Web hosting, relevant publications and magazine subscriptions, and even part of my monthly Internet bill. Separately, these are all pretty small expenses, but they do add up over the course of the year.
BND: What can small business owners do throughout the rest of this year to make next year's tax filing an easier process?
Anderson: The most important thing to do throughout the year is to keep track of your income and expenses in an accounting solution. This will not only help you stay on top of your business day-to-day, but it will also make sure tax time is easy and painless.
There are numerous mobile apps that can help you easily track expenses, time, invoices, etc. Using mobile solutions means you don't have to scramble when compiling your expenses and time from one month to the next, especially when tax season rolls around.
Yoneda: Once taxes are filed, it's a good idea to reflect on any items or issues that made the 2013 tax return burdensome. Were you unsure of total income? Was it difficult to categorize expenses? Consider accounting software that will assist you with that throughout the year.