Xero Survey Reveals Biggest Tax-Time Mistakes Small Business Owners Make

By Frank Byrt

Tax season has a way of highlighting small business owners' financial management lapses. According to a recent survey of 400 accountants conducted by Xero, a provider of online accounting software, the two most frequently cited are (1) failing to keep financial records up to date and (2) not preparing a budget for the year ahead. 
Also high on the list are (1) talking to their accountant only at tax time and (2) failing to understand their tax obligations in order to develop strategies. 
This year, the last-minute tax changes wrought by Congress contributed to the confusion as "nearly one in four accountants say government regulations and tax policy had the biggest impact on small businesses this year, and more than one in ten attribute this to uncertainty surrounding the 'fiscal cliff,'" Xero said. 

Six Tax Tips for Small Business Owners from Xero

1. Record all receipts: Out-of-pocket expenses and business-related auto mileage were the most frequently overlooked deductions, so it's important to establish and maintain an accurate system for storing your receipts. One relatively new approach to accomplish that is to use Cloud-based storage technologies.

2. Business equipment expenditures deductions: Section 179 of the IRS Code allows small businesses to deduct the full purchase price of qualifying equipment and/or software up to $500,000, in both the 2012 and 2013 tax years. 

3. Home office deductions: Starting in 2013, the home office tax deduction allows small business owners and employees who work from home and who maintain a qualifying home office to deduct up to $1,500 per year. 

4. Accounting season is every season: Meet with an accountant year-round. Select an accountant with a fixed fee and value price that includes tax and accounting services. An accountant's planning and financial counsel can take some of the anxiety out of managing a small business. 

5. Note the payroll tax rate change: Because the American Taxpayer Relief Act didn't extend the payroll tax reduction put in place in 2010, the tax rate reverted back to the original amount of 6.2 percent for employees and 12.4 percent for the self-employed.

6. High earners need to be aware of health care tax changes: Under the Patient Protection and Affordable Care Act, beginning in 2013, higher-income taxpayers must pay a 3.8 percent additional tax on net investment income, money that will not be deducted from paychecks. And, there will be an additional Medicare tax of 0.9 percent on wage and/or self-employment income in excess of $200,000 for single filers, $250,000 for joint filers, and $125,000 for married taxpayers filing separately.

Xero advisor Jody Padar, who is also a CPA and CEO of the New Vision CPA Group, told AccountingWEB that her small business and individual clients have been particularly anxious this year about the tax increases they face. Those increases hit home for many taxpayers when they saw a decrease in their paychecks when the FICA rate went up at the start of the year as well as for many business owners faced with rising health insurance costs for their employees, Padar said. "People were talking about it after they felt it. They've been asking us what they can do to better address all these changes."
Padar said a significant number of changes highlight the need for small business owners to meet with an accounting advisor regularly so tax time will be less stressful. The Xero survey findings support that view:
  • 42 percent of the accountants surveyed said small business clients should meet with their accountant on at least a monthly basis.
  • 63 percent said business owners should prepare for tax season all year long; in particular, they should keep their financial records up to date. 
In the survey, 72 percent of accountants said they "could provide better advice if given a real-time view into their client's finances, and nearly one third would be willing to offer discounted fees to sit down to a reconciled ledger."
A first step toward that for many business owners would be to post financial data regularly to a Cloud-based accounting system, an idea that's catching on with accountants. In fact, 43 percent of those surveyed said they're planning to offer Cloud-based services to clients this year, up from 11 percent last year. This in an indication that an increasing number of small businesses owners are realizing the benefits of real-time access to their financials, said Jamie Sutherland, Xero's president of US operations
Additional Survey Questions and Responses
What's the most common mistake businesses make that could trigger an audit by the IRS?
  • Excessive deductions to income – 43 percent
  • Misidentifying their workforce (e.g., employees versus contract workers) – 27 percent
  • Home office deductions – 11 percent
  • Mixing business and personal expenses in deductions – 1 percent
  • Other – 9 percent
  • Not sure – 10 percent
What's the most commonly overlooked deduction for small business owners?
  • Out-of-pocket expenses – 34 percent
  • Auto expenses (gas, parking, tolls) – 14 percent
  • Depreciation – 20 percent
  • Office improvements – 7 percent
  • Hiring new employees – 9 percent
What's the strangest item your clients have tried to write off?
  • A family vacation veiled as a business trip – 30 percent
  • Pets and pet food – 15 percent
  • A deadbeat relative – 8 percent
  • Nothing – 16 percent
  • Other – 8 percent (traffic tickets, SpaghettiOs, daughter's wedding, alcohol, escort, clothes for their dog, gambling losses) 
Survey Methodology
Zogby Analytics was commissioned by Xero Limited to conduct an online survey of 400 accountants in the United States. The survey was conducted from February 14 through February 21, 2013. Based on a confidence interval of 95 percent, the margin of error for 400 is +/- 5.0 percentage points.
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