10 Small Business Tax Mistakes to Avoid
When you’re managing your own small business, you’ve got enough on your mind to worry about tax mistakes.
Whether you’re still planning how to start your business or have already made the leap, you need to make sure your taxes are in order.
Tax mistakes that turn up in an audit by the Canadian Revenue Agency (CRA) can lead to costly fines or lawsuits. And while the regular re-assessment period is three years, there is actually no limit on how many years back a CRA audit can go under certain circumstances.
That means that any mistake you make now can come back to haunt you later. Ensuring you file your taxes correctly the first time will save you a lot of stress down the road as you continue to grow your business.
This article will go through some of the most common tax mistakes that small businesses make and how you can avoid them.
1. Improper Record Organization
Are all your business-related receipts sitting in a drawer in a big pile that you only sort through when tax season comes around?
Trying to sort your receipts and records once a year, just in time for filing your taxes, makes you a lot more likely to misplace things and make errors.
Instead, you should get into the habit of filing your expenses as they occur. A good filing system, and dedicating a few minutes every week to organize your expenses will go a long way to making sure that tax season isn’t an annual nightmare.
2. Forgetting To Deduct Start Up Costs
When you start a new business, there are often many costs that you’ll incur before you ever make your first sale.
From buying equipment such as computers, machinery, and furniture, to office essentials like pens and paper, there can be a lot of costs associated with starting a new business.
Make sure you don’t forget about properly claiming your start-up costs. Claiming these costs can really ease some of the financial burden of running a new business.
Also make sure you know about the other standard tax deductions that you are eligible for each and every year.
3. Mislabeling Employees as Contractors (and Vice Versa)
Any people that your business employs will need to be classified as either employees or contractors.
You will need to make tax contributions for employees (along with CPP and EI), but contractors are responsible for their own taxes.
There are a lot of factors you need to consider, but the CRA provides a comprehensive guide.
You need to ensure that you have classified the people you work with properly, whether they are employees or contractors.
4. Combining Personal and Business Accounts
When starting your business, you probably used some of your own money to cover the initial costs. It seems reasonable to think that since it’s all your own money anyways, money you make from or spend on your business can just go through your personal account.
In reality, this is going to cause you a lot of problems.
You need to have a separate bank account for your business. This will help you keep track of what expenses and income can be attributed to your business, and which ones are personal.
If any personal expenses, such as groceries or clothing, end up getting mixed in with your business expense claim, you are going to draw the CRA’s attention pretty quickly! If you’re not working from separate accounts, there’s a higher chance the wrong expenses will be filed and you could be subject to an audit.
The same thing goes for credit cards. Having a separate business credit card will make sure that you can keep track of your business expenses easily; it will save you a lot of stress when tax season rolls around.
5. Not Keeping Up to Date on Tax Deductions
Tax deductions are not static. In fact, the rules tend to change a little bit each year.
While your business likely keeps you pretty busy, it is worth taking the time to do some research.
Keeping up to date on any new tax deductions, whether they are federal or provincial, will help save you money and get back more on your returns.
It will also make sure that you don’t unintentionally break the rules since you didn’t know they changed.
6. Trying To Do It All in Excel
When you start a business, you’ve got to be smart about cutting out unnecessary costs. So maybe when you considered accounting software, you thought that was any easy way to save; can’t you keep track of all your expenses yourself in a spreadsheet?
Of course you can. The problem is that it likely isn’t worth it.
Trying to keep track of your expenses in a simple spreadsheet can make the whole process time-consuming and frustrating.
Buying accounting software is an investment in your business. It will make you less likely to make mistakes when reporting your taxes.
Plus, the time you save is time that you can spend working on your business.
7. Not Checking Your Submission
If you’ve left your taxes to the last minute, it can be stressful to rush over things in a bid to get them filed on time.
You’ve got to try to leave yourself enough time to completely check your reporting over before you submit it.
This is because little errors can end up being costly. You may be subject to penalties and have to refile.
Small things such as incorrect postal codes or social insurance numbers, missing signatures, and misspellings are frequently made errors. Since you’re so focused on getting the numbers right, it’s easy to overlook these things.
Make sure you always completely check your tax filing over to avoid these sorts of mistakes.
8. Payroll Tax Miscalculation
You’ve got to make sure that you know everything that can be taxed.
It’s not just your earnings and your employees payrolls. You need to pay taxes on bonuses, vacation pay, and other times when an employee earns money outside of their regular salary.
Not knowing and following the rules is a serious infraction. You need to take tax filing seriously and make sure you fully understand the process.
9. Not Filing Your Taxes on Time
Not filing your personal taxes on time can be costly, but it’s even worse for your business.
There are fines and penalties associated for late filing. It is important that you always file your taxes on time to avoid these unnecessary expenses.
The best way to make sure that you file on time is by following the other tips on this list, spreading out the tasks throughout the year.
This will ensure that you’re not leaving yourself a mountain of work right at the last minute.
It will also mean that you don’t have to rush to get everything filed. If you’re rushing, you are more likely to make mistakes that will result in penalties later.
10. Avoid Auditing Red Flags
There are certain signals that will stick out like a sore thumb on your tax returns. Any mistakes or strange looking reporting on these things will make you far more likely to be audited.
Generally, you should be very careful claiming any expenses that might appear personal.
For example, if you have a vehicle, you may use it for personal and for business reasons. You must be very careful that you are only claiming the business uses when you make your tax filing.
This means you need to have clear, well-kept records. It also means understanding what expenses apply. For travel expenses, did you know that driving to and from your workplace cannot be claimed as a business expense?
Meal and entertainment expenses are also another area where large claim amounts could raise red flags. You need to be absolutely certain that what you are claiming is legitimately a business expense, and that you are claiming it correctly.
If you are unsure, it is likely worth erring on the side of caution.
Keeping Your Small Business Free From Tax Mistakes
Now you know the top ten mistakes that cause problems when small business owners file their taxes.
Avoiding these mistakes will help ensure that you can avoid unnecessary audits and headaches. You will have a smooth and easy tax season, knowing that you have done your filings correctly.
Plus, correct filings will make sure that you are getting the deductions and returns that you deserve! So set your business up for success and make sure your tax filings are flawless.